By Reicelene Joy N. Ignacio

THE PHILIPPINE ECONOMY is not overheating, but this does not mean the central bank will dial back the cumulative 175-basis-point interest rate hike it fired off last year to ease inflation pressures.

“There was no overheating seen within the economy of the Philippines. Some analysts covering the Philippines last year were worried of overheating because of the inflation we saw. What the inflation ended up doing was to cut… disposable incomes of households… and that weighed down consumption,” Vincent Conti, S&P Global Ratings Asia Pacific economist, said in a Friday webcast.

“Inflation has sharply fallen and is now back to target range,” he noted.

“We support the view that the Philippines is not overheating; [but] It does not mean for us that monetary policy settings, that policy rates, should go back to before inflation shocked last year.”

Overheating in an economy occurs when a country’s productive capacity cannot keep up with demand in a fast-growing economy, and rising inflation is a key overheating warning sign. Headline inflation had picked up for nine straight months to a nine-year-high 6.7% in September last year that was sustained in October, before slowing for five straight months to a 15-month-low 3.3% in March. The Bangko Sentral ng Pilipinas (BSP) increased policy interest rates by a total of 175 basis points in five meetings last year, leaving the key benchmark at a decade-high 4.75%.

“We think the BSP does have the preference to cut back on the overtightening they were forced into last year, but they will not go all the way back to the 175 basis points (bps) they had to raise last year,” Mr. Conti said.

He added that slowing global demand — as reflected in easing purchasing managers indices including for the Philippines — “is a bit of headwind, but I would not be so concerned about it.”

“The switch to cash-based budget system in the Philippines would be [followed by] an uptick in infrastructure spending in the second half of the year…” he said, adding that the country, “unlike many of its neighbors in Asia, also has a very strong domestic component of growth led by strong growth consumption by the middle class.”

Andrew Wood, S&P director for Sovereign and Internal Public Finance Ratings, said that gross domestic product “growth may slightly underperform in the first half of the year especially due to delay [of 2019 budget enactment and]… the reenacted budget,” but added: “We’re expecting it to pick up in second half of the year.”

Mr. Wood said S&P, which on April 30 gave the Philippines its highest credit rating yet at “BBB+”, is now watching for progress in the government’s remaining tax reforms, including one that will cut the 30% corporate income tax rate in a bid to attract more foreign direct investments.