July 23, 2017 | MANILA, PHILIPPINES

2017 conditions to be ripe for rate hike

THIS YEAR will see generally better business prospects, strong overall economic growth and a continued inflation pickup, two banks said in separate notes yesterday, with one adding to projections that conditions will eventually be ripe for a tightening of monetary policy.


The central bank is likely to raise policy rates this year on the back of rising inflation and strong economic growth, although the looming change in leadership at the Bangko Sentral ng Pilipinas (BSP) could affect the timing of policy decisions, ANZ Research said in its Feb. 15 Southeast Asia Insight.

ANZ economist Eugenia Fabon Victorino said she expects inflation to log 3-4% this year while gross domestic product (GDP) is seen to grow by 6.9%, picking up from 2016’s 6.8% average and falling within the government’s 6.5-7.5% growth goal.

“Strong domestic demand is set to push headline inflation higher into the upper half of the central bank’s 2-4% target range in 2017 and 2018... Based on this outlook for higher inflation, we and local market participants expect the BSP to raise its policy rate corridor by 50 basis points in 2017,” the analyst said in a Feb. 15 report, which if realized will bring the benchmark rate to 3.5% from 3.0% currently.

LEADERSHIP CHANGE WATCHED
“It is however important to note that the current BSP Governor Tetangco is expected to step down in July this year after having served for 12 years. The choice of the new central bank leadership may have a bearing on the degree and pace of tightening.”

BSP Governor Amando M. Tetangco, Jr.’s second and final term ends on July 2, leaving the top post to a successor yet to be named by President Rodrigo R. Duterte.

Among those seen in the running to replace Mr. Tetangco are BSP Deputy Governors Diwa C. Guinigundo and Nestor A. Espenilla, Jr.; former Monetary Board Member Peter B. Favila who also previously headed the Philippine National Bank, Allied Banking Corp. and Security Bank Corp.; EastWest Bank president Antonio C. Moncupa, Jr. and former Banco Filipino vice-chairman now Foreign Affairs Secretary Perfecto R. Yasay, Jr.

Both Mr. Tetangco and banking industry leaders have said that appointing a successor from within the BSP would be the best option to ensure a smooth transition and assure policy continuity, while Mr. Duterte’s Partido Demokratiko Pilipino-Lakas ng Bayan has voiced its support for Mr. Moncupa, who also heads the ruling party’s think tank.

Economists have said that they expect the central bank to tighten monetary policy as early as this semester as inflation bottoms out from two straight years of averaging below two percent, and to keep pace with looming rate hikes in the United States.

Inflation logged 2.7% in January, the fastest pace in over two years. Central bank officials have said that inflation is more likely to trend higher in the coming months, particularly due to proposals to raise taxes on fuel and cars under a tax reform package now being discussed in Congress.

Ms. Victorino said the tax plan could boost inflation by as much as 1.5% over the course of a year, while a “staggered” implementation would have a softer impact on prices.

The central bank currently expects inflation to average 3.5% this year, rising from 2016’s 1.8% but still within the 2-4% target band.

GOOD SIGN
ANZ expects strong economic growth to continue, riding on a state infrastructure push and firm private sector activity.

The current account balance -- which gives a glimpse of money flows between the Philippines and the rest of the world in terms of goods and services -- is expected to deteriorate further as imports, mostly of capital goods needed for planned investments, continue to outpace exports.

The foreign lender expects the current account surplus to have narrowed to $1.4 billion, equivalent to 0.5% of GDP, last year -- supported by a 5.1% rise in remittances from Filipinos abroad -- from 2015’s 2.6% share tallied in 2015.

Capital formation is seen to keep the current account neutral or even swing it to a “modest” deficit this year, but this is unlikely to worry regulators.

“As these imports are reflective of a strong investment cycle and longer term growth by implication, the central bank remains comfortable with the deterioration in the current account,” the report read.

ANZ also welcomed state plans to raise its 2017-2022 budget deficit target to 3.0% of GDP from the 2.0% set in the last six years, since this will be driven by an increase in infrastructure spending to 5.4% of GDP this year from 2016’s programmed 5.1%.

However, the bank said, “realization of these targets, which in turn will influence the country’s import demand, is contingent on further removal of bottlenecks in public infrastructure spending.”

“[T]he institutional capacity of government agencies and local government units to speed up public spending is still limited,” the report read, recalling that “over the last few years, realized infrastructure spending has averaged only 2.9% of GDP despite rising planned allocations,” it added.

“These limitations of infrastructure spending suggest that risks to a significant deterioration in the current account may be contained.”

Higher levels of public spending, ANZ said, will complement continued firm private sector consumption.

BUSINESS GENERALLY BETTER
Standard Chartered Bank, in a separate Feb. 15 report, titled: “ASEAN client sentiment on the mend”, said it polled clients on their views on business prospects for the year when it conducted in annual briefings in six Southeast Asian cities in January and earlier this month.

“Compared to 2016, clients appear slightly more optimistic this year,” the bank said, noting that optimists have continued to outnumber pessimists in Vietnam, Indonesia and the Philippines.

The bank’s clients in Vietnam turned out to be the most bullish in the region “due to a low base effect”, since the country endured a drought-induced growth slowdown last year, while the US pullout from the Trans-Pacific Partnership made businessmen more cautious.

Clients in the Philippines were “slightly less bullish” despite strong growth momentum, Standard Chartered noted, due to a high growth base effect last year and concerns over an emerging anti-globalization policy in the US, which accounts for 77% of Philippine service exports.

In the Philippines, optimists among respondents increased to 56% for this year from 51% for last year, while pessimists increased to 31% from 20%, respectively.

Client sentiment in Thailand -- the most improved -- was second only to that of Vietnam, while those in Singapore and Malaysia remain negative overall “although their level of bearishness has moderated versus 2016.”

Standard Chartered said it expects Vietnam and the Philippines to lead Southeast Asian growth at “more than 6.5%, though the Philippines’ growth may be a touch softer due to a high base.” -- Melissa Luz T. Lopez with Danica M. Uy