Think tanks: Higher inflation, interest rates to temper PH growth

Think tanks expect the Philippines’ short-term economic growth outlook to be tempered by high consumer prices, while the central bank’s aggressive interest rate hikes are seen to rein in elevated inflation.

“We see a moderately deteriorating outlook, especially in Thailand and the Philippines where inflation pressures are hastening policy normalization,” Lucila Bonilla, emerging markets economist at UK-based Oxford Economics, said in a report on Friday.

In general, “emerging markets look vulnerable to a potential recession in advanced economies as global demand and trade slow,” said the think tank, which identified the Philippines, Chile, Malaysia and Thailand among emerging markets “most in danger of a sharp weakening in trade.”

“Higher inflation is eroding consumer spending. Meanwhile, higher interest rates, slower credit and collapsing equity markets have all contributed to tighter financial conditions, threatening investment. This backdrop supports our view of a stronger-for-longer dollar,” Oxford Economics said.

“Typically, a stronger dollar hurts emerging markets through several channels, including balance sheet and deleveraging effects. Indeed, emerging markets’ financial conditions continue to tighten and are close to getting as tight as they were at the peak of the COVID-19 crisis,” the think tank added.

Oxford Economics nonetheless noted that “emerging markets have so far weathered financial tightening well enough.”

“For most, their tightening cycles are close to peaking as they got well ahead of the curve compared to advanced economies, and high commodity prices will partially offset the strong dollar effects this year. Also, their policy frameworks have improved in the last decade and their fiscal predicaments appear manageable,” Oxford Economics said.

As headline inflation averaged 4.4 percent in the first half, above the Bangko Sentral ng Pilipinas’ (BSP) 2 to 4 percent target band of manageable price hikes conducive to economic growth, the regulator so far this year hiked the policy rate by a total of 125 basis points (bps) to 3.25 percent, including an off-cycle 75-bp hike this month to arrest the peso’s slide to 17-year lows.

Elevated inflation, which hit 6.1 percent in June or the highest since the 2018 rice crisis, was among the reasons why President Marcos’ economic team downscaled to 6.5-7.5 percent from 7 to 8 percent previously the gross domestic product (GDP) growth target for 2022. Global commodity prices, especially of oil and food products, had been on the rise mainly due to the prolonged Russian invasion of Ukraine.

High consumer prices had been putting pressure on Filipino households’ consumption — a major economic driver — and their dwindling savings, while a global recession was looming. At the same time, higher interest rates on bank loans may temper borrowings and investments of both households and businesses.

In a report last week, London-based Capital Economics said “hawkish comments from the central bank in the Philippines mean further rate hikes are likely in the near term, but with inflation likely to peak soon, the tightening cycle should be over before the end of the year.” The think tank expects another 75 bps of rate hikes for the rest of this year.

“While inflation is likely to remain elevated for the next few months, it should peak soon. Energy price inflation should start to decline over the coming months as last year’s low base drops out of the annual comparison. The recent declines in global commodity prices will also put downward pressure on inflation,” Capital Economics said.

“Meanwhile, slower growth should also keep underlying price pressures low. Although the economy appears to have experienced a reopening boost in the second quarter, weaker global demand, tighter monetary policy and high commodity prices will cause growth to slow in the second half of the year. We expect GDP growth to slow from 9 percent this year to 7 percent in 2023,” Capital Economics added. The government targets a more ambitious 6.5-8 percent annual growth rate starting next year up to 2028 in order to outgrow the ballooning debts wrought by the prolonged COVID-19 pandemic. —Ben O. de Vera, INQ