By Luisa Maria Jacinta C. Jocson, Reporter

HEADLINE INFLATION likely quickened for a fourth straight month in May, mainly due to a spike in electricity costs, analysts said.

A BusinessWorld poll of 16 analysts yielded a median estimate of 4% for the consumer price index (CPI) in May. This is within the 3.7-4.5% forecast of the Bangko Sentral ng Pilipinas (BSP) for the month.

If realized, May inflation would be faster than 3.8% in April but slower than the 6.1% print a year earlier.

It would also mark the sixth straight month that inflation settled within the central bank’s 2-4% target range.

The Philippine Statistics Authority is set to release May inflation data on Wednesday (June 5).

“We expect CPI inflation to rise to 4% in May. The rise largely comes on the back of unfavorable base effects, and the sequential momentum likely remained contained,” Makoto Tsuchiya, an economist from Oxford Economics, said in an e-mail.

“Even with a modest month-on-month pickup, base effects remain unfavorable, and we expect inflation to still accelerate to 4% year on year — touching the BSP’s upper bound target,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said in an e-mail.

Analysts said the faster inflation print in May is primarily due to higher electricity rates.

“Upward price pressures will come from higher electricity rates as retailers pass on higher costs from the Wholesale Electricity Spot Market amid a jump in electricity demand when temperatures spiked across the country in May,” Moody’s Analytics economist Sarah Tan said in an e-mail.

“That also resulted in power shortages, which led authorities to issue the red and yellow alerts,” she added.

From January to May, the National Grid Corp. of the Philippines had placed the Luzon and Visayas power grids on red alert for 12 and eight days, respectively.

Yellow alerts have been raised over Luzon and Visayas for a total of 27 and 26 days, respectively. Mindanao was placed under yellow alert for two days.

“The heatwave increased demand and prices for electricity, with the latest increase in Manila Electric Co. (Meralco) electricity rates,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in an e-mail.

Customers in areas served by Meralco saw their overall rate climb by P0.4621 per kilowatt-hour (kWh) to P11.4139 per kWh in May due to the increase in the generation charge.

“However, these upward pressures were tempered by lower costs of key food items such as rice, fish, and fruits, and rollbacks in LPG and domestic pump prices,” Chinabank Research said.

Security Bank Corp. Chief Economist Robert Dan J. Roces said food price growth likely slowed in May, although rice will still remain a “major culprit.”

In April, rice inflation was recorded at 23.9%, easing from 24.4% in March. Rice inflation in March was its fastest print since February 2009.

Agriculture department data showed that the average price of a kilogram of local well-milled rice ranged from P48-55 as of end-May while regular milled averaged P45-52 per kilogram.

UPTREND
Chinabank Research said it expects inflation to “sustain its recent uptrend and remain above the BSP’s target until July, unless significant price reversals materialize.”

Zamros Bin Dzulkafli, economist at Maybank Investment Banking Group, said that inflation would likely overshoot the 2-4% target band from May to July, in line with the central bank’s expectations.

The BSP is anticipating faster inflation from May to July but expects inflation to ease to the target after July.

“We expect the headline inflation to hover around 4% in the coming few months, but this is unlikely to make the BSP more hawkish, as such an overshoot is already priced in by the central bank,” Mr. Tsuchiya said.

Ms. Tan said if inflation settles below the upper end of the target, this would add to the case for a rate cut in August.

“This is contingent on subsequent readings before the August policy meeting staying below, or at, the upper bound, which is what we are expecting. Otherwise, the first cut may only come in the fourth quarter,” she added.

BSP Governor Eli M. Remolona, Jr. earlier said the central bank can cut rates as early as August, possibly by 25 basis points (bps).

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said he expects the Monetary Board to “keep policy settings neutral” at the June 27 meeting.

“Rhetoric could become even less hawkish, especially if headline prints fall below expectations,” he added.

“I doubt that the May print will significantly affect the BSP’s thinking in June, assuming the breach of the 4% mark is only small and if core inflation remains subdued and stable,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.

The Monetary Board kept its key policy rate steady at a 17-year high of 6.5% for a fifth straight meeting in May.

From May 2022 to October 2023, the central bank has raised borrowing costs by 450 bps to tame inflation.

NO RATE HIKE
Ms. Tan noted that the BSP is unlikely to deliver a rate hike this year.

“It is unlikely that inflation will sharply exceed the BSP’s upper target of 4%, so we don’t expect any more hikes. A cooling core inflation reading will also give BSP confidence to keep the policy rate steady,” she said.

Philippine National Bank (PNB) economist Alvin Joseph A. Arogo said that the BSP should not reduce rates until inflation can settle “sustainably” within target.

“Moreover, our monetary authorities should not cut ahead of the Fed or else risk further exchange rate weakness. If the Fed eases by 25 bps each in September and December, this opens the room for the BSP to follow in October and December,” Mr. Arogo added.

On May 21, the peso closed at P58.27 against the greenback, its first time closing at the P58-per-dollar level since Nov. 10, 2022.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said a rate cut would likely be delivered later this year, but not before the US Federal Reserve.

“With inflation plateauing in the near-term despite the drought effects alongside a benign core, we believe the risks to the outlook has moderated that support a BSP rate cut later in the year,” he said in an e-mail.

“We do not believe the BSP will cut its policy rate before the Fed because the Monetary Board will wait until El Niño effects have receded, local food supply has normalized, and rice inflation has materially narrowed,” he added.

The Federal Reserve is more likely to deliver a long-awaited rate cut in September after a US Commerce department report showed inflation made a bit of progress toward the Fed’s 2% goal last month and spending softened, traders expect, Reuters reported.

After the data release, traders priced in about a 53% chance of a rate cut in September, versus about 49% before the report.

Mr. Dacanay likewise said that rate cuts are off the table until the Fed turns more dovish.

“The timing will be important to provide some support to the peso throughout the BSP’s easing cycle,” he added.

MORE short-term foreign capital left the Philippines than entered for a second straight month in April, data from the Bangko Sentral ng Pilipinas (BSP) showed.

BSP data showed that transactions on foreign portfolio investments registered with the central bank through authorized agent banks posted a net outflow of $312.18 million in April.

This was smaller than the $351.87-million outflow in the same month a year ago. However, net outflows widened from the $236.02-million outflow seen in March.

Foreign portfolio investments are commonly referred to as “hot money” due to the ease by which these flows enter or leave the country.

Gross inflows jumped by 28.2% to $913.62 million in April from $712.83 million in the same month a year ago. Month on month, inflows fell by 35.1% from $1.4 billion in March.

The bulk or 59.5% of investments went into Philippine Stock Exchange (PSE)-listed securities, mainly in banks, holding firms, property, transportation services and food, beverage and tobacco.

The rest of the registered investments went into peso government securities.

The BSP said that the majority of total foreign inflows (87.9%) came from the United Kingdom, Singapore, Luxembourg, and Hong Kong.

Meanwhile, gross outflows stood at $1.2 billion during the month, 15.1% higher than $1.1 billion a year ago.

On the other hand, outflows declined by 25.4% from $1.6 billion in the previous month.

By destination, almost half or 43% of total outward remittances went to the United States, equivalent to $527 million.

For the first four months, hot money yielded a net inflow of $65 million, a turnaround from the $680-million outflow in the same period in 2023.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that the decline in hot money outflows may be due to geopolitical tensions.

“The narrower net foreign selling may have to do with the easing of geopolitical risks between Israel and Iran with no new response between the two since April 20,” he said in a Viber message.

“Inflation still within the BSP’s target despite some slight pickup in recent months is also an offsetting positive factor, as global crude oil prices still hovered among two-year lows or since January 2022 recently,” Mr. Ricafort said.

Inflation accelerated for a third straight month to 3.8% in April from 3.7% in March. However, it marked the fifth straight month that inflation settled within the central bank’s 2-4% target range.

“Risk factors that still contributed to the net foreign selling recently include the El Niño drought that led to higher local rice prices and weaker peso exchange rate that led to some pickup in inflation,” he added.

Leonardo A. Lanzona, an economics professor at the Ateneo de Manila, said in an e-mail that the central bank’s latest signals could impact hot money flows.

“While the more stable inflation rate has reduced the outflows to some extent, the announcement that BSP will moderate its hawkish position on interest rates can bring about substantial outflows and lead to some financial instability,” he added.

BSP Governor Eli M. Remolona, Jr. has said the central bank can start cutting rates as early as August. The central bank could cut by 25 to 50 basis points (bps) this year, he added.

The Monetary Board has stood pat for five straight meetings, keeping its benchmark rate at a 17-year high of 6.5%. It raised borrowing costs by a total of 450 bps from May 2022 to October 2023.

“In addition, the current depreciation of the peso can lead to even higher outflows,” Mr. Lanzona said.

The peso sank to the P57-per-dollar level for the first time in 17 months in mid-April.

On Friday, the local unit closed at P58.51 per dollar, strengthening by 12.5 centavos from its P58.635 finish on Thursday. Its close on Thursday was the peso’s worst finish in almost 19 months or since its P58.80 close on Nov. 3, 2022.

Mr. Lanzona noted that hot money flows may also be driven by “speculative behavior” where investors capitalize on short-term market movements that lead to rapid inflows and outflows of capital.

“It’s important to note that hot money flows can be highly volatile and sensitive to market sentiments, making them a potential source of financial instability for economies heavily reliant on foreign capital inflows,” he added.

The BSP expects foreign portfolio investments to end the year at a $1.3-billion net inflow. — Luisa Maria Jacinta C. Jocson

THE NATIONAL Government’s (NG) debt service bill fell in April amid a drop in amortization payments, the Bureau of the Treasury (BTr) said.

Data from the BTr showed that debt repayments declined by 21% to P161.695 billion in April from P204.763 billion in the same month a year ago.

Month on month, the debt service bill plunged by 69.7% from P533.523 billion in March.

More than half (58.3%) of debt servicing during the month went to amortization.

Principal payments in April dropped by 40.6% to P94.199 billion from P158.51 billion in the same month a year ago.

Domestic debt payments slumped by 64.2% to P55.097 billion in April from P153.959 billion a year ago.

On the other hand, amortization on foreign obligations shot up (759.2%) to P39.102 billion from P4.551 billion.

Meanwhile, interest payments stood at P67.496 billion in April, 45.9% higher than P46.253 billion in the same month in 2023.

Broken down, interest on local debt jumped by 67.3% to P46.427 billion in April from P27.75 billion a year ago.

This consisted of P38.437 billion in fixed-rate Treasury bonds, P3.575 billion in retail Treasury bonds, and P2.703 billion in Treasury bills.

Interest paid on foreign debt went up by 13.9% to P21.069 billion in April from P18.503 billion a year ago.

FOUR-MONTH DEBT SERVICE
Meanwhile, the NG’s debt service bill rose by 49% to P1.15 trillion in the first four months from P770.479 billion in the same period a year ago.

Payments for amortization climbed by 52.4% to P887.243 billion as of end-April from P582.249 billion a year ago.

Principal payments on domestic debt were recorded at P754.77 billion, while those on external debt stood at P132.473 billion.

Meanwhile, interest payments rose by 38.4% to P260.488 billion in the January-April period from P188.23 billion.

Broken down, interest paid on domestic debt reached P185.305 billion, while interest payments for external debt amounted to P75.183 billion.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that the NG debt service bill in April declined due to lower debt maturities paid for both principal and interest payments.

Debt payments fell despite elevated interest rates that drove up borrowing costs as well as a weaker peso that increased the peso equivalent of foreign debt, he added.

In May, the Monetary Board kept its key policy rate steady at a 17-year high of 6.5% for a fifth straight meeting.

The central bank has raised borrowing costs by a cumulative 450 basis points (bps) from May 2022 to October 2023.

On April 16, the peso fell to the P57-per-dollar level for the first time since November 2022. This was also its worst close in 17 months at the time.

Separate data from the BTr showed that the NG’s outstanding debt rose by 0.61% to P15.02 trillion as of end-April from a month earlier, mainly due to peso depreciation

As of the first quarter, the debt-to-gross domestic product (GDP) ratio stood at 60.2%.

The government set its debt-to-GDP ratio target at 60.3% this year. It is aiming to bring this down further to 55.9% by 2028. — Luisa Maria Jacinta C. Jocson