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Economics: Philippines
Economics – Markets – Strategy
With its inflation
target shattered,
the central bank
will lift interest
rates by a further
75bps, taking the
repo rate to 7.25%
by end-08
Slower growth in
the US will weigh
on remittances;
peso weakness
helps only to a
degree
Business spending
will rise by a decent
7% this year, but
largely on public
spending
As will interest rate hikes
Still, our inflation forecasts are well above the BSP’s inflation targets for this
year and the next. This year the central bank’s inflation target is at 3-5%, and
next year inflation is targeted at 2.5-4.5%. In view of this, we expect the central
bank to continue the tightening cycle it embarked on earlier this month. The
overnight reverse repo (borrowing) and repo (lending) rates were lifted 25bps
to 5.25% and 7.25% respectively, and we expect a further 75bps of tightening
before the year is up, to be delivered in three moderate steps of 25bp each.
These interest rate hikes should help to contain risks of a wage-price spiral by
dampening activity. Under pressure from the unions to mitigate the impact of
higher food and fuel prices on workers, the government in mid-May mandated
a nation-wide increase in private-sector minimum wages, to be rolled out in the
different regions over the next few months. Some areas (like metro Manila) will
see moderate hikes of around 5%, but increments in some provinces will come
to around 10%. Some of these wage increments will also come on top of previous
wage orders still currently being implemented. As part of a longer-standing
plan, public sector workers are also set to receive a 10% pay rise on July 1.
Admittedly, even after lifting rates by a further 75bps, monetary policy can still
be described as “loose”; after adjusting interest rates for inflation, they are
negative. In other words, the value of money sitting in a consumer’s bank deposit
actually decays, and there is greater incentive for him to take it out to spend or
invest. But free spending would occur only if consumers had no concerns over
economic and labour market prospects.
Clearly this will not be the Chart 5: Remittances and real US GDP growth
case in the coming quarters.
We continue to expect the US
% YoY % YoY, 3mma
to fall short of longer-term 4.5
30
potential growth both this year
Remittances
4.0
and the next, having pencilled
(RHS)
US GDP
25
3.5
in growth of 2.0% and 2.6%
respectively; potential growth 3.0
20
is widely thought to be between 2.5
2.75-3.25%. Given that the US
15
2.0
accounts for 53% of the
Philippines’ remitted earnings 1.5
10
and 17% of the export market, 1.0
this will have a negative bearing
5
on domestic wage and spending
0.5
patterns (Chart 5). Further 0.0
0
weakness in the peso this year Mar-02 Mar-04 Mar-06 Mar-08
will help soften the blow on
both remitted earnings and
exports – we expect USD/PHP to end the year at 47.00 – but not sufficiently.
Investment to remain robust on public spending
Investment spending was the only component in the first quarter GDP figures
that did not disappoint us, and while we believe last year’s 11.8% surge in
capital outlays will not be replicated, investment this year should still rise a
decent 7.0%. However, this is likely to ride on public, rather than private outlays.
As input costs like oil and commodities continue to rise and it becomes increasingly
difficult to pass on higher costs to consumers, private firms will feel greater
margin pressure. In such an environment, business spending plans will naturally
be deferred. Indeed, private-sector investment indicators so far this year have
been very weak. According to the BSP’s second-quarter Business Expectations
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