Faster Fed hikes likely to hit PHL external position
By Luz Wendy T. Noble, Reporter
THE PHILIPPINES’ external position and the peso will likely weaken as investors start to price in the US Federal Reserve’s planned March interest rate hike and sustained policy tightening.
Given this possibility, the Bangko Sentral ng Pilipinas (BSP) is now faced with the decision to focus on either growth accommodation by keeping rates low or financial stability by recalibrating monetary policy, said former BSP Deputy Governor Diwa C. Guinigundo.
“If domestic rates don’t adjust, we might see capital outflows, peso depreciation, gross international reserves drain and increase in our debt spreads,” he said in a Viber message.
Fed Chairman Jerome H. Powell said the US central bank was likely to begin hiking interest rates in March to tame runaway inflation, Reuters reported.
In the Philippines, the balance of payments (BoP) position already saw narrower surplus in 2021, and this could deteriorate further when the Fed raises interest rates, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said.
BSP data showed the BoP position stood at a surplus of $1.345 billion in 2021, much lower than the $16.022-billion surfeit in 2020 mainly due to wider trade deficit as imports recovered.
“March rate hikes by the Fed could likely lead to a reversal of financial flows, a key support for the country’s external position given that the current account has slid back into deficit territory,” Mr. Mapa said in an e-mail.
A Fed rate hike in March would also hit the peso as investors prepare for more rate increases in 2022, Sophia Ng, an analyst at Mitsubishi UFJ Group Global Markets Research, said.
The peso closed at P50.999 a dollar on Dec. 31, 6.2% weaker than its P48.023 finish a year earlier.
“I think the first order of impact will be on foreign exchange, namely the peso, especially with markets now even starting to price-in a probability of five rate hikes by the Fed this year,” Ms. Ng said in an e-mail.
“We also see risks of more outflows from the equity markets, which will ultimately have an impact on the (Philippine peso) as well,” she added.
On the bright side, she said relatively lower foreign ownership of Philippine equities and bonds will mean the impact of a rate hike on the peso will “unlikely be as large” to what will be seen in other currencies within the region.
At this point, Fed’s hawkish signals and improving economic growth in the Philippines could strengthen the case for the BSP to consider starting tightening monetary policy as well, ING’s Mr. Mapa said.
He noted that BSP Governor Benjamin E. Diokno previously said they would want at least four to six consecutive quarters of economic growth before considering policy rate adjustments.
“With the Philippines posting three quarters of expansion, it looks like we’ll just need one more quarter of decent expansion before this trigger point is hit. This brings a rate hike by May or June a possibility,” he said.
The economy expanded by 7.7% year on year in the fourth quarter of 2021, quicker than the revised 6.9% growth in the third quarter.
This brought full-year growth to 5.6%, surpassing the downgraded 5-5.5% target set by economic managers and a turnaround from the 9.6% record contraction in 2020.
Mr. Diokno has said a rate hike is unlikely within the first half of the year. He assured the BSP’s exit strategies will be carried out smoothly to ensure recovery will be sustainable and to prevent long-term scarring on the economy.
The Monetary Board will have its first policy review meeting of the year on Feb. 17.
