Is economy overheating?
APPARENT threats of an overheating economy due to continuing heavy dollar inflows have finally caught the eye of the International Monetary Fund (IMF).
The surge in dollar inflows was earlier cited by the Bangko Sentral ng Pilipinas as the primary reason for the continuous appreciation of peso-dollar rates and the inflation uptick.
This precarious situation, combined with the economy’s strong first quarter performance, has prompted economic planners to scurry back to their drawing boards.
Socioeconomic Planning Secretary Cielito F. Habito said they still have to study whether or not the inflation uptick is “money supply-driven.”
If it is, Mr. Habito said monetary authorities may just have to further relax current monetary targets to reflect the bullish growth — a kind of flexibility the IMF has given the Bangko Sentral under the three-year economic program.
But the IMF suspects otherwise.
SPECULATION?
“They asked whether the inflows were due to speculation or not,” Finance Secretary Roberto F. de Ocampo said.
He said the Bangko Sentral has assured the IMF technical panel led by Kadhim Al-Eyd that “quite a lot of the inflows are not of speculative nature” and cited the increasing volume of overseas contract workers’ ( OCW) remittances as a big contributing factor.
Bank economists polled by BusinessWorld, however, shared the IMF’s observations. They said OCW remittances were not really been much of a factor as much as portfolio investments.
INVESTMENTS
Since the bulk of foreign portfolio investments mainly flows in and out of listed stocks and government securities, economists said they are not considered accurate indicators of foreign investors’ long-term confidence in the economy.
A bank economist said about 30 local companies are scheduled to issue their initial public offerings (IPOs) this year, and foreign investments allocated for IPOs may easily reach $ 1.6 billion (P42.88 billion).
Another bank economist ruled out the growth in money supply as a primary factor. Compared with the end-1993 level of about P162 billion, he said reserve money has been relatively stable since January, hovering between P150 billion and P153 billion.
Curiously, recent Bangko Sentral figures bore out these observations. A big bulk of the growth was mainly bolstered by the tremendous boost in inflows from portfolio investments which registered at $736 million during the quarter compared with only $309 million in the same period last year.
Capital inflows during the first quarter grew by 205.2% to $1.63 billion, compared with $534 million during the same period in 1993.
The bank economists said they do not see any huge dollar outflow in the near term.
“Even if they scrap the forward cover on oil companies, this will just eventually exacerbate rising inflation since oil firms will have no working capital and will have to resort to increasing their domestic prices,” the economist said.
In sustaining its dollar buying spree, the appreciation has already cost the central monetary authority $ 1.435 billion during the past five months of the year.
The economists also raised doubts that Government will meet its 8.5% inflation target this year.
The situation is expected to be exacerbated when the country finally secures the nod of the International Monetary Fund for a three-year economic program that will infuse roughly $675 million in loans to the system.
1994 THIS article was originally published on June 14, 1994.