The Bangko Sentral ng Pilipinas (BSP) dispelled concerns that the Philippine economy may be at risk of overheating due to rapid credit growth and a widening current-account deficit.
BSP Deputy Governor Diwa Guinigundo defended the country’s metrics, saying everything, particularly the growth of credit in the country, remains “manageable” and is likely to improve the country’s productive capacity down the line.
This is after international credit watcher Fitch Ratings flagged the country for risks of overheating.
“Growth prospects remain favorable, supported by strong domestic demand and increasing infrastructure investment. However, Fitch believes that overheating risks remain in place, highlighted by rapid credit growth and a widening current-account deficit, although the Central Bank’s stated intention is to remain vigilant against developments that could affect the inflation outlook,” the credit watcher said in its most recent assessment of the Philippines.
An overheated economy is characterized by spikes in inflation following a period of high economic growth. The imbalances in an overheating economy can cause a disconnect between supply and demand, overproduction that leads to an economic output gap, which could negatively affect several sectors in the economy.
Guinigundo said the Philippines, even though it has seen high growth and high inflation, is a “different case” and is not at a risk of overheating, based on local and international standards.
“While credit is growing, the pace of increase is within levels considered manageable based not only on the BSP’s own metrics but even on international benchmarks,” Guinigundo said.
“Additionally, credit growth in the country is driven not only by consumption but, more importantly, by investment activities which boost the economy’s productive capacity,” he added.
“As such, we see growth in demand continually and sufficiently being matched by rising supply, thereby continuing to dampen demand-side inflationary pressures moving forward,” Guinigundo added. Earlier, Guinigundo said issues about the Philippine economy overheating are “quite misplaced.”
“Our estimates show that potential output growth has been rising, averaging 6 percent for the period of 2010 to 2017. So the talk about the large output gap is without basis. Our output gap is either a small positive or a small negative,” he said.
Fitch Ratings has kept the Philippines’s investment grade of “BBB”, projecting sustained robust economic growth in the years ahead, driven in part by massive public infrastructure investments.
The Philippines’s “BBB” rating with Fitch matches the “BBB” rating assigned by S&P Global and the “Baa2” rating by Moody’s Investors Service. In the meantime, S&P assigned a “positive” outlook on its rating on the Philippines, signaling an opportunity for an upgrade.