Fitch: Rate hikes could weigh on growth

By Melissa Luz T. Lopez, Senior Reporter
THE CENTRAL BANK’s stronger tightening step last week could initially dampen growth, a Fitch Ratings analyst said, although robust domestic demand should continue to support expansion.
Stephen Schwartz, head of sovereign ratings for Asia Pacific at Fitch, said gross domestic product (GDP) growth could take a hit following an aggressive rate hike from the Bangko Sentral ng Pilipinas (BSP) at its Aug. 10 policy meeting.
This comes after a disappointing six percent GDP expansion in the second quarter.
“As you note, the Q2 GDP outturn was below expectations, and [Thursday’s] 50bp rate hike by the BSP could put some further downward pressure on growth for the remainder of the year,” Mr. Schwartz said in an e-mail interview when sought for comment.
Economic expansion eased to its weakest pace in three years due to slower growth in consumer spending, even as this was offset by a surge in state spending.
By industry, exports contracted from a year ago while farm output stood flat, the Philippine Statistics Authority announced Thursday last week.
That same day, the BSP tightened rates by 50 basis points in a bid to temper inflation expectations, even as it acknowledged that supply pressures — which are beyond the central bank’s scope — have been driving prices higher.
Despite this, the Philippines will remain a growth leader in Asia Pacific even though the government’s 7-8% target may be missed this year.
“Nevertheless we still expect the Philippines to be a strong growth performer this year and next, due to a combination of strong domestic demand and a still-resilient external environment despite rising risks from the escalation in trade tensions between China and the US,” the credit analyst added.
As of its last review, Fitch expected the Philippine economy to grow by 6.8% this year, faster than 2017’s 6.7% pace.
Actual GDP growth averaged 6.3% last semester, as the first-quarter place was revised lower to 6.6%.
In December, Fitch upgraded the Philippines’ credit rating to “BBB” — or one notch above minimum investment grade — with a “stable” outlook. This was affirmed early July in the face of strong growth prospects, although the debt watcher flagged rising inflation, rapid bank lending and a wider trade gap as key risks to the outlook.
Fitch analysts had then flagged that the Philippine economy is facing “overheating” risks, but said the BSP’s policy tightening moves may help contain such risks.
The BSP introduced back-to-back rate hikes in May and June of 25bp each, before whipping up a tougher response last week as inflation continues to surge. Prices of widely used goods jumped by 5.7% in July to mark a fresh multiyear high, which pulled the year-to-date average increase to 4.5% against the central bank’s 2-4% full-year target range.
The BSP now sees full-year inflation averaging 4.9% this year and 3.7% next year.
BSP Governor Nestor A. Espenilla, Jr. has said that the Philippine economy is robust enough to “accommodate a further tightening” in interest rates.
SEEKING A ‘DELICATE BALANCE’
In a separate statement issued yesterday, the inter-agency Financial Stability Coordination Council (FSCC) said its members were working to “strengthen” long-term finance through various policies geared to ensure the country’s resilience amid “volatile” times.
“Financial markets are extraordinarily volatile this year and the FSCC continues to assess the possible impact to the Philippines of changing macro-financial conditions,” said Mr. Espenilla, who heads the FSCC as chairman.
“The challenge is to intervene early enough so that systemic risks do not build up but not too early that they derail our own growth momentum. We continue to be cognizant of this delicate balance, nurturing innovations and ideas while providing appropriate prudential oversight.”
The FSCC held its quarterly meeting yesterday. It is composed of the BSP, the Department of Finance, Bureau of the Treasury, Insurance Commission, Philippine Deposit Insurance Corp. and the Securities and Exchange Commission.