The central bank believes the Philippines will sustain its growth momentum despite the risk posed by uneven global economic conditions and divergent monetary policies abroad, but analysts see the need for stronger buffers such as against a strengthening US dollar.
The Bangko Sentral ng Pilipinas (BSP) said in its Fourth Quarter Report on Economic and Financial Developments it is closely monitoring countries with which it has strong trade ties, where Filipino workers have been deployed and where tourists are expected to come from the Association of Southeast Asian Nations, United States, Europe, Japan and China.
“In particular, economic activity in the US is expected to continue to strengthen, while the recovery in the euro area and Japan are seen remaining modest,” the BSP said.
“Moreover, growth in major emerging markets [EMs] such as China and Russia also appears to be moderating.”
Victor Abola, an economist at the University of Asia and the Pacific (UA&P), agrees with the bank’s report but said the country must continue to strengthen buffers against these risks.
“I agree that we are in a better position to face these risks than most emerging economies. However, we will need to put into place the right policies and measures to be able to blunt the negative impact of some of these developments such as the strengthening of the US dollar,” he said.
The government has sufficient financial resources to accelerate infrastructure spending to fuel momentum for growth, according to the BSP paper. Remittances from overseas Filipino workers offer a source of funding for bank credit, provide a buffer against funding pressures and help insulate domestic demand.
The banking sector has adequate capitalization levels, it said, adding, the impact on capital of a likely increase in bank’s non-performing loans will be manageable.
The bank said the oil price slump and uneven growth prospects in advanced economies are likely to reinforce the existing trend of decoupling in monetary policy, particularly the Bank of Japan, European Central Bank and the US Federal Reserve Board.
The search for yield could either lead to more capital inflows to emerging markets such as the Philippines, where yields remain generally higher, or capital outflows because of the strong appeal of US assets under favorable economic trends and eventual tightening of its monetary policy.
“Thus, emerging markets, including the Philippines, could face a reversal in capital flows and exchange rate pressures,” the report said.
The Philippines also faces tighter financial conditions from volatile global financial markets due to the Fed’s normalization but its possible adverse impact on liquidity, interest rates and capital flows could be counter-balanced by monetary accommodation in the eurozone and Japan, it said.
Falling international oil prices have moderated domestic inflation and the risk of demand-led deflation is likely to be minimal because domestic demand remains firm.
“Like most oil-importing countries, the Philippines stands to benefit from the significant decline in oil prices, which could lead to lower domestic inflation and increase in consumption and investment growth,” the bank said.
“Lower oil prices, likewise, provide the BSP flexibility to keep policy rates at current levels in support of economic growth,” it added.