HSBC says remittances give BSP room to hold interest rates

MANILA, Philippines—British banking giant HSBC sees resilient overseas remittances giving the Bangko Sentral ng Pilipinas leeway to keep its benchmark interest rate, the overnight borrowing rate, at a record low of 3.75 percent.

In a commentary issued in the wake of Monday’s release of the latest remittance data, HSBC economist Trinh Nguyen also said the government’s 5-6 percent gross domestic product (GDP) growth target for the year was attainable.  HSBC’s forecast is a GDP expansion of 5.7 percent for this year.

The HSBC economist said the better-than-expected 7.6 percent growth in August overseas remittances would “provide ample support for the consumption-driven economy.” She noted that the remittance data was in stark contrast to the 9-percent year-on-year contraction in export earnings for the month.

Exports make up 21 percent of Philippine gross domestic product while remittances account for 9 percent based on 2011 data.

With global demand weak and inflation expected to be on target for the rest of 2012, Nguyen said, the BSP would have room to hold rates low at 3.75 percent at its next meeting.

The BSP has two more policy rate-setting meetings for the remainder of 2012, one on October 25 and the last on December 13.  Monetary authorities, however, have recently signaled willingness to cut interest rates further, which many analysts believe may be spurred more by concerns over capital flows and peso appreciation rather than economic growth.

“The statistics underscore Philippines becoming an even more service-based economy supported by private consumption,” Nguyen said, noting that in the first semester, private spending rose by 5.4 percent in real terms as remittances expanded by 5.1 percent.

“The recent acceleration of remittances points to robust third-quarter private consumption growth. At the same time, fiscal spending is also supporting public spending and investment. Growth, therefore, is expected to reach the government’s 5-6 percent target,” she said.

But while price growth has remained benign in the mid-range of the 3-5 percen target, Nguyen said inflationary risks were tilted to the upside.

“We expect prices to stay stable in the next couple (of months), but inflation will begin picking up significantly in first quarter of 2013 due to an unfavourable base effect and an anticipated recovery from China. As such, we expect the BSP to continue to support domestic spending by keeping rates at a historic low while remaining vigilant on inflation,” she said.

On Monday, the BSP reported that inflows from overseas Filipinos had risen by 7.6 percent year-on-year in August, better than the market consensus growth of 5 percent and the prior month’s reading of 5.4 percent. On a sequential basis, remittances rose 1.7 percent month-on-month from 0.5 percent in July.

For the first eight months, total remittances reached $13.7 billion, rising by 5.5 percent from the previous year.

Key sources of remittances were the U.S. (43.1 percent percent of total), Canada (9.5 percent), Saudi Arabia (7.7 percent), the United Kingdom (4.9 percent), Japan (4.9 percent), the United Arab Emirates (4.2 percent) and Singapore (4 percent).

From January to September this year, a total of 231,316 job orders,  mostly professional jobs,  were processed in response to the manpower requirements in Saudi Arabia, the United Arab Emirates, Kuwait, Qatar and Taiwan.