‘Imbalances’ to weigh on peso, prod monetary policy tightening

THE CENTRAL BANK will have to raise policy rates to contain rapid credit growth and a widening trade deficit in order to ease the downward pressure on the peso, analysts at ANZ Research said.

“Against this backdrop of strong import growth and export performance which has at best followed the global trade cycle, the trade deficit has widened…,” ANZ economists Sanjay Mathur and Eugenia Fabon Victorino said in a report released on Monday.

“These imbalances are unlikely to fade without adequate tightening of monetary policy.”

The bank analysts held on to their forecast of one rate hike from the central bank this year, even as other economists have said that a rate increase is unlikely anytime soon with inflation remaining within a 2-4% official target range.

ANZ observed “intensifying” imbalances in the Philippine economy, as seen in the double-digit credit growth particularly for the real estate sector, alongside a reversal in the country’s external position.

The monetary authority said the rapid rise in credit relative to gross domestic product (GDP) — with the annual uptick roughly at three percentage points — “calls for vigilance”, the bank analysts said.

Bank lending grew by 19% to P6.713 trillion in June from a year ago, according to latest available data from the Bangko Sentral ng Pilipinas.

On the other hand, ANZ also pointed out the widening gap in external trade, as imports continue to outpace export receipts to a level beyond what remittances and business process outsourcing sales can offset.

The Philippines posted a $318-million current account deficit in the first quarter, equivalent to 0.4% of gross domestic product.

This compares to a $600-million deficit expected by the central bank for full-year 2017 and constitutes a reversal from the $601-million surplus posted in 2016.

The BSP kept benchmark borrowing rates steady during last week’s policy review, pointing out that inflation remains “manageable” alongside firm domestic demand.

Inflation averaged 3.1% in the seven months to July, just below the central bank’s latest 3.2% estimate for the entire year.

“Considering the Bangko Sentral ng Pilipinas’ hesitation to tighten monetary policy, it is likely that these imbalances will persist. As a result, it will be the Philippine peso that would need to bear the burden of adjustment,” the bank’s market report read.

BSP Governor Nestor A. Espenilla, Jr. sought to calm markets over the weekend, saying that the peso would not do a “free fall” with the central bank armed with enough buffers to temper sharp swings in exchange rate.

The central bank chief also downplayed the pessimism over the current account, saying that it was “natural” for an emerging economy to incur deficits as it stocks up on capital goods and raw materials for investment needs.

Despite this, the peso yesterday weakened to P51.08 to a dollar from Friday’s P50.98 finish, marking its weakest value in nearly 11 years or since Aug. 28, 2006’s P51.21-per-greenback finish.

The peso averaged P50.0263 against the greenback in the seven months to July, according to latest central bank data, against an official P48- to P50-per dollar assumption for 2017 and 2018. — Melissa Luz T. Lopez