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GLOBAL
ratings firm Fitch Ratings expects a continuous
tightening of monetary policy in the Philippines to
address the double-digit growth in June, which is
threatening the country’s credit ratings.
“Our expectations in RP is that monetary
policy will continue.... [In effect], banks will be more
cautious. Banks will move to tighten their credit
standards,” Fitch Ratings managing director James
McCormack said at the UnionBank Thought Leadership
Conference on Friday.
In a separate development, the chief of
the Senate economic affairs panel, Loren Legarda, said
that while the central bank’s move to raise by 50 basis
points its policy rates on Friday was the right response
to inflation risks, a thorough review of economic
policy was still necessary, considering that the factors
pushing inflation are global and a bigger arsenal of
options should be set in place.
At the UnionBank forum, McCormack said
that right now, the credit-rating agency is “more
comfortable” with the country’s political position and
is more concerned over the double-digit inflation level,
which it deems the biggest challenge for the economy.
“We are more comfortable with the
political situation right now. We are more concerned
[with] the fiscal position. When inflation moves to
double-digit, it is necessary to raise interest rates,”
he said.
He said that while the Philippines has
not “lost control” of its inflation to reach levels like
those of Vietnam and Sri Lanka—reaching above 25
percent—it is nonetheless alarming since double- digit
inflation can lead to a “severe economic slowdown.”
“I won’t say that the Philippines is in
that same trend but it’s a little bit worrying. Our
biggest concern is getting inflation back down,” he
said.
Inflation reached 11.4 percent in June.
The central bank on Thursday raised interest rates by 50
basis points, more than what was expected.
McCormack said this was a “positive
move” on the part of the BSP, as “it suggests that the
central bank is taking a serious move against inflation.
It improved its credibility.”
He said rising inflation is currently a
big threat to the sovereign credit fundamentals of most
emerging markets.
“With inflation moving higher,
governments are again looking to external sources of
financing, thus reintroducing the exchange-rate risk to
their balance sheet,” he said.
The credit-rating firm rates Philippine
government bonds “BB” which is below investment grade.
Policy
review amid inflation
Meanwhile, the government should review its economic
policies in light of the surging inflation that the BSP
predicts would persist until the first quarter of 2009,
according to Sen. Loren Legarda.
She commended the BSP’s move raising key
interest rates by half a percentage point last week to
fight the 11.4-percent inflation, the highest since 1999
when the country got hit by the Asian currency crisis.
“Since inflation is a global problem,”
Legarda said, “our country will give off the impression
that this economic trouble can be managed, thereby
assuring potential investors that we are still worth
investing into. And this is due to BSP’s quick action.”
While Legarda remained positive that the
BSP move will, in effect, encourage savings and reduce
the liquidity of money in circulation, she worried that
the debtors would be in a rather tight position, “and so
are the micro, small and medium enterprises [MSMEs],
which account for 99 percent of total commercial and
industrial establishments and employing 69 percent of
labor force in the country.”
She warned that “what the country is
experiencing is not a simple downward fluke in the
economic cycle, which, when not tended properly, could
lead to a massive slump that may even surpass that of
the late 1990s Asian financial crisis.”
At the same time, the senator suggested
that the government look for sustainable solutions to
avert the looming crisis, and prevent future problems
while lessening the vulnerability of people from the
negative economic shocks. “We should explore
alternatives and arrive at a compromise on the different
proposals being brought forward. It should be a
balancing act between welfare losses and fiscal
stability,” she said, referring to the proposals
regarding taxation on petroleum products.
Fitch:
Spend on social services
Fitch’s
McCormack said that while the Philippines will likely
weather the international credit uncertainty, the
government needs to spend more on infrastructure, social
programs and education.
“The improvement in the fiscal balance
we saw in the last few years was because expenditure
declined to manage the previous revenue decline. This is
not a great way to solve the fiscal problem and we do
not believe it is sustainable over time,” he said.
The government posted a P769-million
budget surplus in June despite government assurance that
it will spend more on infrastructure this year.
The budget deficit for the first
semester is down to P18 billion, P23 billion lower than
the programmed P41 billion fiscal gap for the period.
“We think there are genuine expanding
needs in the Philippines which are not being met,
particularly in infrastructure, social programs and
education,” he said.
He noted that the government should be
working on ways to improve tax collection. C.
Valencia, B. Fernandez |
