Higher interest rates in the United States may be considered a good sign for trading partners like the Philippines despite shocks it may inflict on the economy.
Nevertheless, the Philippines can weather these shocks because of strong macroeconomic fundamentals, Monetary Board member Valentin Araneta said during the CFA Society Philippine Investment Conference on Tuesday.
“At the outset let me say that my personal view is that rising interest rates in the US would be a good sign at this stage because it confirms that the world’s biggest economy and a major trading partner of the Philippines is robust, and that by raising the interest rates it means that the monetary authorities are confident of achieving their inflation targets,” Araneta said in a keynote speech.
“It also means increases in investment, output, revenues, employment and imports of goods and services from its trading partners—that’s us,” he added.
However, adjustment shocks will have to be absorbed at the onset because of the huge amount of “fickle” portfolio capital sloshing around the global financial markets searching for yield which will go back to the US markets if and when the interest rates there go up.
“[W]e know very well the so-called portfolio investments can come and go very easily depending on where they see opportunities in yield and capital gains. That is why another term for them is the ‘hot money,’” he said.
On the other hand, he said the economic data of the Philippines display strong fundamentals that position it well to weather stresses emanating from policy adjustments among its trading partners.
Strong fundamentals were characterized by fiscal policy space, monetary policy space and price stability, strong external accounts and current account surpluses, consistent market-oriented economic policy directions, a well-capitalized and robust banking system, and the benefits of Association of Southeast Asian Nations (Asean) Economic Integration, he claimed.
“Well targeted expenditures in infrastructure, poverty alleviation, education and health are not only effective stimuli to growth but also good for the foundations of balanced economic development,” he said.
The inflation rate has been kept low and stable. More importantly, the central bank has a range of policy tools to address upside and downward risks to the inflation rate.
He noted the country has consistently enjoyed current account surpluses over the past 13 years and the capital accounts has seen a steady growth of foreign direct investment as well as long-term loans from the multilateral and official country sources.
Araneta highlighted the 10-point economic agenda of the Duterte administration as consistent with economic policies that have been pursued in the past, varying only in degree of emphasis in some cases, such as infrastructure expenditures, with such expenditures focusing more on the regions outside of Metro Manila.
“The degree of emphasis on inclusive growth and poverty alleviation has also been enhanced, which in the long run should be good for the peace and order situation and therefore good for greater investments,” he said.
Araneta pointed out that the trends in competitiveness in the business process outsourcing industry, tourism growth and other services are good fundamental factors that will boost the dynamism of our economy within an Asean framework, a market of over 600 million people and a per capita income of $3,900.
“The message, therefore, is that in spite of the vagaries and volatilities pertaining in a world of policy divergence, the secular trends, the consistency of economic policies and the fundamentals of the Philippine economy should give us confidence that we can weather volatilities from external sources,” he said.