‘Strong’ macro fundamentals to go through new litmus test – analyst
The Philippine economy may not be spared the pressure that comes from the US Federal Reserve’s decision to hike its key interest rates, even if it had been expected.
Local monetary authorities and economic managers now look poised to monitor domestic inflation and growth dynamics even as they talk about building the country’s buffers against the fallout.
The US Federal Reserve raised its key interest rates by 25 basis points to between 0.50 percent and 0.75 percent on Wednesday (Thursday in Manila).
In a quick reaction to the move, the Philippine stock market fell in an early session by about 1 percent, and failed to bounce back by the close of Thursday trade, settling with a 1.05 percent loss at 6,853.86 points.
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr., said the local market reaction on Thursday was not unexpected, although he acknowledged that the Fed appeared more hawkish than the global markets had expected.
Although the 25-basis point US rate hike fell within consensus forecasts, global markets weakened upon learning of Fed Chair Janet Yellen’s stance for faster paced rate increases next year under the Donald Trump administration.
The peso also weakened, finishing trade on the Philippine Dealing System down at P49.96 against the US dollar on Thursday, losing 23 centavos from Wednesday’s P49.73.
Fed dot plot
“What will be spoken of more today is the Fed dot plot, which shows a more ‘hawkish’ Fed than the market first expected,” Tetangco said.
In forecasts released after the Fed meeting, Yellen said 17 Fed members indicated that they could hike the Fed funds target rate three times next year, instead of the two quarter-point increases previously forecast for next year.
They also raised the forecast for future years to three hikes in both 2018 and 2019.
However, Tetangco countered: “But even then market would likely not dwell too much on that because the market also knows that those dots do change over time.”
He also expressed hope that the recent US dollar-peso movements have factored these in and that any further movement during the remainder of the year would only just be small refinements to banks’ positions.
“Going forward, we will watch for indicators on how global markets judge the potential expansionary US fiscal policy, its impact on global demand, prices of global commodities and how these would affect our own domestic inflation and growth dynamics,” he added.
Socioeconomic Planning Secretary Ernesto Pernia said the Fed rate hike had been largely anticipated and the financial community had prepared for it.
“In terms of its in impact on the economy, I guess we will have to do some fine-tuning in interest assumptions when we have the DBCC [Development Budget Coordination Committee] meeting on December 20,” he said.
Meanwhile, Finance Secretary Carlos Dominguez 3rd also voiced optimism that the country’s rock solid macroeconomic fundamentals, along with the Duterte administration’s infrastructure buildup strategy, will create enough fiscal and monetary buffers for the Philippines to ride out external shocks, such as the latest rate move by the US Fed.
“This Federal Reserve hike has long been anticipated,” he said, “and that speculation over this move has been one major cause of the market jitters that have riled financial markets across the globe in recent weeks.”
Hence, he said, the normalization of the interest rate regime in the US is likely to have a calming effect on the markets in the long haul.
Dominguez expressed confidence that “the domestic economy remains strong and is resilient enough to ride out the initial impact of such an external shock as the Fed hike, more so with its commitment to go full steam ahead on its aggressive infrastructure program that will be a major growth driver [during]the Duterte watch.”
“Apart from filling the massive infrastructure backlog that has for decades now blunted the country’s global competitiveness as an investment haven, the government’s plan to spend a record P8 trillion on public infrastructure over the next six years will keep the domestic economy on its high growth path—and insulate it from external shocks,” he added.
National Treasurer Roberto Tan also pointed out that “the rate hike has long been anticipated” and that “the market would have to digest the impact of this move, including the foreseen three other rate increases for 2017 and expectations for new fiscal and economic policies of the Trump presidency.”
In line with what the Finance secretary said earlier, Tan added: “We remain confident that despite these external developments and market volatility, the country’s fundamentals and economic resilience will carry us forward.”
New litmus test
A private analyst sees higher US interest rates leading to potentially bigger capital outflows, higher domestic yields and further dampening pressure on the peso and local stocks.
“Consequently, higher borrowing costs could weigh down economic growth by tempering investment and consumer spending,” Guian Angelo Dumalagan, market economist at the Land Bank of the Philippines, said.
Dumalagan could only hope that such negative consequences would be offset by the government’s plan to ramp up public spending next year.
Justino Calaycay Jr., marketing and research head of A&A Securities, expects higher rates will put pressure on the Philippines’ financial/fiscal and investment positions.
“The Fed’s shift to a hawkish gear moving forward is proof it recognizes the strides made by the world’s largest economy—it is firmly on the path of full recovery and normalization,” he said.
Calaycay added that investment opportunities are likely to open up to investors abroad while the impact of global headwinds on emerging economies that benefited from increased liquidity during the Fed’s easing phase will continue to result in outflows as portfolios find a new equilibrium amid the changing dynamics.
“Now more than ever, the strong macros our new economic managers have boasted of going into next year, including the proposed spending program next year, will face its litmus test,” he added.