IN the midst of the global economic headlines heralded by Greece and China, the Philippines registered one of its lowest monthly inflation of 1.2 percent for June. This is the lowest, at least in the last three decades. Prior to this, the lowest was in August 2009 at 1.7 percent, and in May 2015 at 1.6 percent (using 2006 as base year). This was also below the consensus forecast of about 1.5 percent.
An important point here shows that the consensus forecast already expected inflation to be hitting the lowest in decades. This means that analysts have been expecting inflation to fall, but actual inflation is falling faster!
This is good news, especially for the ordinary savers who have yet to experience a real positive return for their savings account since 2003. This is also happening when the economy is experiencing a low interest-rate regime (see chart). Under a low interest-rate condition with a positive real interest return, people are given a full array of choices for investments. Those who are risk-averse can benefit from savings and time deposits, while those who are business-oriented can benefit from the low lending rates.
Low interest rates and low inflation also open opportunities for those considering investments with higher return and higher risks. We also view inflation to remain at this low level—in fact, possibly below 1 percent in the coming months—before rising back above 1 percent toward the end of the year. This is, of course, assuming the continuing stability of food prices and the relatively up and down fuel prices, which, on the average, is basically flat.
Coupled with this positive development is the raising of the country’s credit rating to “BBB+” by the Japan Credit Rating Agency (JCR). “BBB+” is the highest rating under the lower medium investment-grade range used by Standard & Poor’s (S&P), Fitch and the JCR. It means that the country can now borrow at lower interest rates abroad and that the Philippines is strongly being seen as a stable investment destination.
This is the highest rating received by the country, and is the closest to reaching an “A” rating.
The JCR gave us this rating because of its view that the country has a stable fiscal position, strong external liquidity and solid growth potentials. Essentially, what the JCR is saying is that it believes that the Philippine economy has a good revenue condition; it can manage its expenses well; it can pay its debts; and that its current foreign-exchange position is enough to weather significant challenges by global and external headwinds.
Furthermore, the JCR is taking the current political jockeying as a stable political condition. Although this rating is not yet shared by S&P, Fitch and Moody’s, it is most likely that this will lead to stronger Japanese foreign direct investments, which has been coming in since 2010. They include Bandai (toy maker), Shimano (bicycle) and a number of Japanese companies that are shifting operations from China to the Philippines.
However, these good news were overshadowed by the “No” vote of Greece to the referendum regarding its acceptance of the austerity measures proposed by the European Union (EU) and the sharp decline of the Shanghai stock market. The results of the Greek referendum have caused anxiety within the euro zone and also among peer economies.
The No vote means that Greece will have to find ways in responding its severely challenged economy essentially without the help of the EU. It is, however, known that Greece does not have enough resources to meet its need and will, therefore, be troubled. Any help to be extended by the EU without the corresponding responsibility will certainly be detrimental to the finance world.
In a similar vein, the Shanghai stock market—the darling of the last two years succumbed by 30 percent in less than a month. This is despite government efforts to shore it up and support buying.
Once investors understood that the Chinese companies listed in the stock market can no longer provide the expected growth of China, the selling started.
The relatively weaker-than-expected performance of the Chinese economy is now being reflected in its stock markets. Both represent tales of “OVER”—Greece = overspending and China = overvaluation.
These external events undoubtedly overshadowed the good news of the Philippine economy. In the short term, there should be expected
effects, such as falling stock prices and weakening of the peso. However, the Philippine Stock Exchange index (PSEi) has been correcting already since April, adjusting its value to the national growth levels.
The peso has begun to weaken in May from 44.50 to the current levels of close to 45.20, mirroring the declines in the PSEi. The PSEi has already lost about 10 percent from year to date. Hence, any shock adverse effect from China and Greece may have already been factored in.
Nonetheless, it cannot be discounted that some weakening may continue, as global financial adjustments will absorb the shocks until investors begin to look again at the fundamentals of emerging economies. There it will be clearly seen that the Philippines is no Greece and is no China, and, therefore, is unlikely to be lumped with them.
****
Alvin P. Ang, PhD, is professor of Economics and senior fellow of Eagle Watch, the macroeconomic and forecasting unit of the Ateneo de Manila University.
For more details of our forecasts and expectations for the rest of 2015 and 2016, we would like to invite you to the Ateneo Eagle Watch Mid-Year Briefing scheduled on August 6 at the Ateneo Rockwell Campus. As seats are limited, reserve your seats via eaglewatch.soss@ateneo.edu or call 426-5661 loc 5221 or 5222 and look for Riz Jao.