Phl showing signs of overheating — ING

Dutch financial giant ING Bank said the Philippines is showing signs of overheating with the country’s gross domestic product (GDP) growing between six and seven percent over the next five years.

Joey Cuyegkeng, senior economist at ING Bank Manila, said the level of liquidity and bank lending in endJuly continued to indicate a relatively strong economic activity.

An economy is overheating when supply cannot keep up with demand due to growth at an unsustainable rate, driving up prices and causing inflation. The inflated prices in turn reduce consumption leading to a slowdown in growth.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed money supply or liquidity in the financial system rose 13.5 percent to P9.97 trillion while bank loans grew 19.7 percent to P6.48 trillion in end-July.

He said the undersubscribed weekly term deposit auction facility (TDF) indicates that banks would rather utilize its excess liquidity for lending not only for balance sheet and tax position adjustments but in raising profitability as well.

The undersubscription has prompted the BSP to slash the volume of the TDF for the first time since it was introduced in June last year. The size was reduced to P150 billion from P180 billion starting Sept. 6.

The volume of the 28-day term deposits was reduced to P110 billion from P140 billion while the size of the seven-day term deposits was retained at P40 billion.

The country’s GDP growth climbed to 6.5 percent in the second quarter from 6.4 percent in the first quarter, bringing the first half expansion to 6.4 percent.

Economic managers through the Cabinet-level Development Budget Coordination Committee (DBCC) maintained the growth target of between 6.5 and 7.5 percent this year from 6.9 percent last year.

Cuyegkeng said current liquidity condition is unlikely a major source of the peso weakness that has been dragged down by the deterioration of trade and current account balances.

“Market concerns of a current account deficit this year seemed to have now been largely discounted pushing markets to focus on incoming inflows.

However, market talk of bringing in more liquidity into the system either through a cut in reserve requirement ratio and a significant drop in TDF offerings may contribute to some weakness,” he added.

According to Cuyegkeng, the trade fundamentals would likely remain the main driver of weakness of the local currency.

“This weakening tendency is mitigated by official view of the appropriateness of the current monetary policy settings, BSP and economic team’s warnings and anticipated acquisition-related inflows,” the economist said.

Cuyegkeng pointed out monetary authorities would raise interest rates by 25 basis points in December followed by a 50-basis point increase in 2018 to avoid a full blown overheating.