Pressure mounting for monetary policy response to credit growth, imports — ANZ
IMBALANCES in the Philippine economy could intensify further amid an expected rise in commodity prices and accelerated credit and imports growth, analysts at ANZ Research said, in the absence of policy rate hikes from the central bank.
An “elevated” trade deficit coupled with inflation pressures will continue to weigh on the peso, amid declining dollar reserves held by the Bangko Sentral ng Pilipinas (BSP) which have been serving as buffer against external shocks.
The global lender flagged last year the Philippines’ deteriorating current account balance and rapid credit growth as sources of concern for the economy, at a time of rapid economic expansion.
“We will retain our cautious view until we get a decisive and sufficient monetary policy response. In its absence, imbalances can only intensify. Neither credit nor imports can auto-correct to manageable levels, in our view,” ANZ economist Sanjay Mathur said in a report published yesterday.
“Other problems could become more prominent — risks to inflation are to the upside and foreign exchange reserves could continue to drop.”
ANZ expects inflation to average 4.1% in 2018, which would overshoot the central bank’s 2-4% target band and would surge from 3.2% in 2017. The Tax Reform for Acceleration and Inclusion law which took effect this month is expected to add 0.4- 0.7% to headline inflation, excluding secondary effects resulting from increased domestic demand.
ANZ also expects the country’s trade balance to remain in deficit despite swinging back to a surplus during the third quarter of 2017, and after an 18.5% surge in imports reported in November. The bank expects this trend to continue, with buoyant expansion plans among local businesses pointing to signs that imports will further strengthen over the coming quarters.
On the other hand, credit growth was “unabated” as it picked up by 19.2% in November, maintaining the double-digit pace of the past few years.
“While the credit impulse does track the business cycle, a sustained increase can signal a less-productive use of capital. That the strengthening credit impulse has corresponded with moderating corporate profitability is worrying,” Mr. Mathur added. “Residential construction activity has also been robust and excesses may be building up.”
On the other hand, additional revenue expected from the implementation of the TRAIN law — which will fund additional infrastructure projects in the pipeline — is expected to be “positive” for fiscal policy over the long term, ANZ said.
A short-term impact of increased public spending would however “intensify” current imbalances, Mr. Mathur also said.
“Our view has been that these imbalances will take a toll on the currency. These views did not fully play out in 2017 — the trade deficit narrowed for a few months and the PHP, though still a regional underperformer, held up better than we had anticipated,” the bank added.
ANZ said two rate hikes worth 25 basis points each within the first semester are the needed policy response from the BSP: “In its absence, the above discussed imbalances can only intensify and exert depreciation pressure on the PHP.”
The peso has weakened again past P50 to the dollar this month.
BSP Governor Nestor A. Espenilla, Jr. has said that the monetary authority has no compelling reason to raise rates just yet, given “limited evidence” of overheating in the local economy with output, liquidity, price and credit conditions still favorable.
Strong growth in the manufacturing sector also showed robust economic activity, coupled with robust private household spending and increased investment in public infrastructure, Mr. Espenilla added. These provide leeway for the central bank to keep rates steady despite tightening moves in the United States.