Sweet spot no more

With high inflation, credit raters eyeing tweaks to growth forecasts for PHL

INTERNATIONAL credit ratings agency Moody’s Investors Service is looking to revise downward its growth forecast of the Philippines, following recent developments that put the country out of the so-called economic sweet spot of high growth and low inflation.

In an interview with the BusinessMirror, Moody’s Vice President and Senior Credit Officer Christian de Guzman confirmed that they will revise their current 6.8-percent growth forecast of the Philippines downward, following the weaker-than-expected 6-percent growth in the second quarter of the year.

De Guzman said the disappointing 6-percent second-quarter growth, coupled with the rapid tightening monetary policy levers and the negative outlook on external demand, will cause the economy to fall short of their earlier growth trajectory projection.

The Philippines’ persistently high inflation rate, de Guzman also said, reinforced their July view that taming the strong growth of consumer prices poses  material challenges to local policy makers.

Despite public concerns on slower growth, the Moody’s official said the Bangko Sentral ng Pilipinas (BSP) has made the “appropriate response” in dealing with the stubbornly high inflation rate of the country, and lauded its “data-dependent” moves.

In a separate response to the BusinessMirror, International Monetary Fund (IMF) Resident Representative to the Philippines Yongzheng Yang also affirmed that they are currently monitoring developments in the local economy and will revise forecasts when warranted.

Yang also specifically mentioned the need for further tightening from the BSP, even after the Central Bank already hiked its main policy rates by a total of 100 basis points in the past months.

“Specifically, there is a need for further tightening of monetary policy by raising interest rates, supported by keeping the fiscal deficit broadly unchanged from last year. This would help reduce inflationary pressures,” Yang said.

“At the same time, structural reforms—e.g., tariffication of rice import restrictions, tax reform, amending the BSP Charter, and shortening the foreign investment negative list—should continue or even accelerate. Such reforms would strengthen market confidence and raise growth potential in the Philippines,” he added.

While both major international analysts see challenges to the local economy, they are in agreement that the Philippines remains a key economic player in the region.

“The fundamentals of the Philippine economy remain strong, although risks have risen in recent months, with managing inflation expectations becoming an important challenge,” Yang said.

“I can say we continue to see the Philippines—even after we revise the GDP [gross domestic product] growth projection—as one of the better performing economies in the region,” de Guzman said.

BSP Governor Nestor Espenilla Jr. had earlier said that while the growth path of the country was tamer in the second quarter of the year, their data showed that it has enough space to absorb the rounds of aggressive monetary policy tightening let out in recent months.

Economic managers and markets, however, expressed concern over the inflation shoot-up in August this year.

Inflation hit its highest in nine years in August, as recently reported by the Philippine Statistics Authority (PSA), wreaking havoc on the near-term market and business sentiment in the country.

The peso, in particular, hit fresh 12-year lows following the announcement, with latest data from the Bankers Association of the Philippines (BAP) showing a P53.85 to a dollar opening value on Friday.

ING Bank Manila economist Joey Cuyegkeng earlier affirmed that the recent weakness of the peso was brought about by the high inflation and the market’s perception of a weak monetary policy response—coupled with external factors.

Latest BSP survey on local business sentiment also showed a significant slump in confidence in local economy dynamics. Firms surveyed during the period groaned amid increasing prices of basic commodities in the global market, augmented by the effects of the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Law on prices of domestic goods. The most pervasive impact cited is that of the higher excise taxes on fuel as imposed by TRAIN, which businessmen said cut across all sectors, raising costs all around.

The quarterly Business Expectation Survey (BES) of the Central Bank, results of which were released late Thursday, showed the overall confidence index (CI) of firms during the period slumped to 30.1 percent—the lowest level of business confidence since the first quarter of 2010.

The BSP will be having its next monetary policy meeting on September 27, and this early several analysts are predicting another rate hike decision.

Image Credits: Skypixel | Dreamstime.com

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Bianca Cuaresma graduated cum laude from the University of Santo Tomas (UST) with a degree in AB Journalism. She was with the BusinessMirror during her internship in 2012 where she was assigned at the Department of Foreign Affairs (DFA) beat. She continued to be of service to the paper after she graduated in 2013. In 2014, she was awarded as the Reporter of the Year by the paper for her coverage in the Bangko Sentral ng Pilipinas (BSP). She is a BusinessMirror reporter for 3 years now, and has covered general assignments and agencies related to banking and finance in the country.