The Philippine economy is far from overheating, the Department of Finance (DoF) said, refuting Moody Investors Service’s warning that rising inflation and a current account deficit are signaling such risk.
“There is ample evidence that the economy is far from overheating,” Finance Secretary Carlos Dominguez 3rd said over the weekend.
Despite affirming the Philippines’ ‘Baa2’ investment grade rating, Moody’s said last week a number of metrics indicated material capacity constraints that signaled risk of an overheating economy.
The credit ratings agency said the prolonged period of robust growth has led to emerging capacity constraints, as represented by rising inflation and the re-emergence of a current account deficit.
An economy starts to overheat when a prolonged period of growth has spurred faster inflation from increased consumer spending, while supply allocations have become inefficient as manufacturers overproduce, creating excess production capacities in an attempt to capitalize on high levels of wealth. That is a description given by Investopedia.
Backing up his claim to the contrary, Dominguez pointed to the first-quarter slowdown in gross domestic product (GDP) growth to 6.4 percent, against a government target range of 6.5 percent to 7.5 percent range and from an actual 6.6 percent in the fourth quarter of 2016 and 6.9 percent in the comparative year-earlier period.
“Inflation is declining – 3.1 percent in May, from 3.4 percent in April – and core inflation is declining, from 3 percent in April to 2.9 percent in May,” Dominguez said.
Investment growth, meanwhile, continued to be robust at 7.9 percent in the first quarter, faster than the 5.8 percent rate of growth in household consumption.
Dominguez also cited the country’s balance of payments as remaining strong, with a deficit equivalent to only 1.4 percent of GDP, while the current account deficit is only 0.45 percent of GDP in the first quarter, lower than the average 4 percent during the 1997 Asian crisis.
The country’s fiscal deficit was running at 2.3 percent of GDP as of May 2017, which was below the 3 percent target of the government.
The debt ratio is also on the decline, down at 43.6 percent of GDP in March 2017, compared with the end-2016 level of 45.9 percent, he added.
“So I don’t think there is really much danger of overheating,” he said.
Going forward, Dominguez said the government continues to take action to sustain the growth momentum and enhance investor confidence in the economy.