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By Maricel E. Burgonio, Reporter
STANDARD & Poor’s (S&P) Ratings
Service warned that state subsidy of food and fuel in countries like
the Philippines compounds existing economic difficulties by bloating
the government’s budget deficit and widening its trade gap.
The credit-rating company’s warning came ahead
of the Bangko Sentral ng Pilipinas’ (BSP) decision to raise its
key interest rates by 50 basis points. After the increase, the
BSP’s overnight borrowing and lending rates now stand at 5.75
percent and 7.75 percent, respectively.
In raising its rates a second time in a row, the
BSP said “concurrent shocks to the economy, such as the persistent
surge in oil prices and spikes in commodity prices have contributed
to elevated inflation readings.”
BSP Governor Amando Tetangco Jr. said the
central bank’s action intends to reduce the risks to inflation
expectations and the long-term cost to growth from prolonged high
inflation.
Besides the Philippines, S&P also pointed to
similar risks in other Asian countries like India, Indonesia, Taiwan
and Vietnam. These countries have increased interest rates to
contain a clear uptrend in inflationary pressure building from
rising food and energy prices.
Rising costs of food and beverages can have
widespread implications on consumer prices, given that the share in
the total-consumption basket can often be as high as 50 percent.
Risks to inflation globally are arising from a combination of
demand-side and supply-side drivers, S&P said.
In the Philippines, the increase in inflation
was driven primarily by high oil and food prices, which led to
higher wages and transport fares. For businesses in particular,
S&P said the downside of higher inflation is likely to result in
compressed corporate margins, as inflation raises input prices
without the ability to pass the increase on fully to the end-user
amid an economic slowdown.
Furthermore, rising inflation is likely to apply
upward pressure on yields and spreads while lowering nominal returns
for holders of corporate bonds vis-à-vis other securities that
offer a hedge against inflation, the credit rating firm said.
It said high economic growth in emerging markets
will drive inflation to increase faster this year. Inflation in
these markets is expected to rise to 8.8 percent this year, higher
than last year’s 5.9 percent. This will be driven not only by
rising fuel and commodity cost but also of high economic growth.
“In the emerging markets, several consecutive
years of high economic growth, along with accommodative fiscal and
monetary policies and credit policies, are accentuating the
inflation trend,” S&P said.
Inflation in Asia Pacific excluding Japan is
expected to reach 6.7 percent this year, higher than 4.4 percent
last year.
“The credibility of central banks is seen
increasingly at risk in both developed and emerging markets.
Ironically, even in the US, inflation fears have risen,
notwithstanding the significant deflationary threat from a material
housing slow-down,” S&P said.
It said the Federal Reserve would likely hold
interest rates until the second quarter of 2009 on continued
evidence of pronounced economic weakness.
Besides raising rates, the BSP also adjusted
upwards its inflation forecast for this year and next. Deputy
Governor Diwa Guini-gundo said the BSP raised its inflation forecast
to a range of 9 percent to 11 percent this year compared with its
earlier forecast of 7 percent to 9 percent. For next year, monetary
authorities forecast inflation to reach 6 percent to 8 percent from
an earlier forecast of 4 percent to 6 percent.
“[The] inflation outlook is more elevated to
what we saw on June 5,” Guinigundo said. “Food and oil prices
have not shown a more benign environment going forward. We want to
be pre-emptive, inflation expectation is beginning to increase,”
he said.
Guinigundo said the Monetary Board based its
decision on the actual June inflation, which rose to a 14-year high
of 11.4 percent. Also leading to the rate adjustment was the
weakness of the exchange rate, as well as expected adjustments in
wages, electricity and transport fares.
Based on its assessment, Guini-gundo said the
Monetary Board expects the country’s economic growth to slow to
5.6 percent this year from 7.3 percent last year. This is below the
government’s forecast of 5.7 percent to 6.6 percent.
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