Fed signals good for the Philippines — Guinigundo

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THE FEDERAL RESERVE’s decision this week to keep rates steady and to trim its massive bond holdings “soon” signals confidence in the US economy’s recovery that, in turn, will benefit the Philippines, a senior central bank official told reporters late on Thursday.

“US Fed’s tentative inclination to normalize monetary policy through a reduction in its balance sheet rather than an aggressive interest rate action could provide us with some space for keeping our monetary stance and sustaining our support for both stable prices and economic growth,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said in a mobile phone message.

The US central bank kept its benchmark lending rate at 1-1.25% — the result of increases of 25 basis point each in December 2015 and 2016, as well as in March and in June after close to a decade of near-zero rates — at the close of its two-day Federal Open Market Committee meeting in Washington D.C. last Wednesday and said it expects to begin trimming its $4.5-trillion bond portfolio “relatively soon.”

The BSP has maintained policy — 3.5% for the overnight lending rate, three percent for the overnight reverse repurchase rate and 2.5% for the overnight deposit rate — steady since September 2014, save for operational rate tweaks in June last year to usher in an interest rate corridor system that was designed to better siphon excess liquidity and influence market rates besides.

Besides helping ensure monetary policy stability, the latest Fed move also signals confidence in US economic recovery that augurs well for the Philippines in the long run.

“With better real sector activities in the US underlying the decision to continue its monetary policy normalization, we expect our exports to continue supporting the trade account so that even if imports increase due to an expanding economy, the current account will remain healthy and sustainable,” Mr. Guinigundo said.

The BSP expects the Philippines’ current account to reverse to a $600-million deficit this year from 2016’s $600 million surplus, partly as it has projected 10% merchandise import growth — fueled by an increased shipments of capital equipment for investment expansion — that will outpace merchandise exports’ expected five percent increase.

Latest preliminary Philippine Statistics Authority data show merchandise exports growing by 16.258% year-on-year to $26.112 billion as of May and merchandise imports actually outpaced by outbound shipments with a 12.291% increase to $37.154 billion in the same comparative five months.

“After all, with more public spending on infra[structure] and higher private investment, we should expect the economy to benefit from higher productivity and efficiency and, ultimately, higher growth and lower inflation,” Mr. Guinigundo said.

The Fed’s latest moves could also attract short-term fund flows, he added, noting “[t]here is a good possibility of some reversal in market sentiment given this monetary decision of the US Fed, as our macroeconomic fundamentals remain robust.”

Foreign portfolio investments yielded a $79.56-million net inflow last month, recovering from May’s $24.35-million net outflow but still dwarfed by the $450.87-million net inflow in June 2016.

Despite hot money’s recovery in June, the first semester still saw a $460.83-million net outflow, reversing from the $593.87-million net inflow recorded in 2016’s comparable six months.

The central bank expects hot money to post a $900-million net outflow this year, reversing a $404.43-million inflow in 2016, according to latest official estimates announced last month.

Friday saw the Philippine Stock Exchange index closing in on its all-time-high 8,127.48 of April 10, 2015, finishing above the 8,000 mark for the second straight day at 8,071.47. It had marked a high of 8,106.74 the preceding day before closing lower at 8,045.78.

Friday also saw the sixth straight trading day of net foreign buying totaling some P2.672 billion since July 21. — J. M. D. Soliman