Moody’s Investors Service said that overheating risks in the Philippines (Baa2 stable) were not yet material, based on Moody’s assessment that current inflationary pressures were due in part to transitory factors and that infrastructure investment and favorable demographics would lift potential growth to meet rapid demand growth.
Moreover, Moody’s expects the country’s external position to remain roughly balanced.
Moody’s analysis is contained in its report on the Philippines titled “FAQ on overheating risks.”
In the report, Moody’s pointed out that the Philippines was one of the fastest growing economies in Asia Pacific in 2017, and second fastest among Baa-rated sovereigns globally. At the same time, it noted that headline inflation hit 3.9 percent year-on-year in February 2018, the highest since October 2014, while the peso recently touched a 12-year low versus the dollar.
In addition, secondary market government yields have risen by 150 basis points since October 2017.
Against this backdrop, Moody’s report answers the following questions:
• What are the risks of a significant rise in inflation in the near term?
• What are the longer-term risks of capacity constraints?
• What does the outlook for the external position tell us about overheating risks?
• Is strong credit growth posing financial stability risks?
On the risks of a significant rise in inflation in the near term, Moody’s said it did not see a significant and prolonged rise in inflation beyond the Bangko Sentral ng Pilipinas’ current estimates of 4.3 percent for 2018 and 3.5 percent for 2019 because Moody’s expected that the impact of the tax measures would prove transitory and that pressure from real wage growth would stay muted.
It said the underlying pattern of inflation did not portend overheating as price pressures had not been generalized across all goods.
As for longer-term risks of capacity constraints, an increasing working-age population, rising productivity levels and better infrastructure will lift long-term potential output and mitigate overheating risks, it added.
Moody’s said that while stronger growth could weigh on the country’s current account through rapid rises in imports of capital goods, it expected that foreign direct investments would be sufficient to finance any shortfall, sustain the country’s overall balance of payments and forestall a rapid depreciation of the peso that could pass through to inflation.
On whether strong credit growth posed financial stability risks, Moody’s said credit growth, while still faster than nominal GDP growth, had moderated and proven more balanced economy-wide, rather than concentrated in sectors prone to overheating.
The banks’ strong capitalization and liquidity, alongside regulations from the country’s central bank, also limited potential risks to the sovereign’s credit quality should nonperforming loans materialize, Moody’s said.