Fears of PH overheating ‘exaggerated’

Despite robust growth, the Philippine economy is far from overheating amid stable inflation as well as an expansion in credit and imports of goods supportive of the ambitious “Build, Build, Build” infrastructure program, according to London-based economic research firm Capital Economics.

“Rapid economic growth, surging imports and strong credit growth have fueled fears that the Philippines is overheating and that the central bank will soon be forced to hike interest rates to bring the economy under control. We think such fears are unfounded,” Capital Economics said in a report released Monday.

“Much of the concern that the Philippines is overheating has focused on the strong recent run of growth. The country has been one of the fastest-growing economies in the region over the past few years,” Capital Economics noted.

Ahead of the announcement today of the fourth-quarter and full-year 2017 gross domestic product performance, the Philippine Statistics Authority last week revised upward the third-quarter figure to 7 percent from 6.9 percent previously.

According to Capital Economics, “GDP figures due to be released [today] are likely to show the economy grew strongly in the final quarter of 2017.” An Inquirer poll among economists showed the GDP likely expanded by 6.7 percent both in the fourth quarter as well as the entire year.

“But fast growth on its own does not signal the economy is overheating. The strong performance could simply reflect an improvement in fundamentals. A number of countries in Asia have been able to sustain even faster growth while at a similar level of development to where the Philippines is now,” Capital Economics pointed out.

While noting that rapid import growth leading to a widening trade deficit was also a sign of an overheating economy, Capital Economics said that in the Philippines’ case, “there are reasons not to be too worried.”

“The fact that the rise in imports is being driven by a surge in imports of capital goods, which is linked to the government’s infrastructure drive, rather than an unsustainable consumer boom, is encouraging,” it said.

In November, a record-high trade deficit of $3.78 billion was recorded, which Socioeconomic Planning Secretary Ernesto M. Pernia had said was “not good, but transitory and manageable.”

Also, while credit growth has jumped by a fifth year-on-year to date, it “on its own has tended to serve as a poor predictor of a financial crisis because it takes no account of the ability of the country to service its debts,” Capital Economics said.

“With much of the new lending going toward the infrastructure sector, the lending surge should help to address some of the key bottlenecks in the economy and in time boost the economy’s debt-servicing capacity,” it added.

Capital Economics said another sign that the Philippine economy was not overheating was that prices remained stable with the inflation rate staying within the government’s target.

“Headline inflation has dropped back in recent months, and at 3.3 percent year-on-year in December, is firmly in the middle of the central bank’s 2-4 percent target range. More importantly, core inflation, which is a better measure of underlying inflationary pressure, remains low,” it noted. —BEN O. DE VERA