Comfortable Consumer Price Index (CPI) and lowering Peso are positive catalysts for Philippine economy
The Philippine central bank will unlikely follow the Bank of Indonesia (BI) and apply tools to curb capital outflow. This means they are expected to keep the policy rate at a record low 3.5% in the first half of 2014.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Recent data suggested that the Philippine economy benefited from its accommodative monetary policy while inflation pressure eased. CPI in July lowered to 2.5% YoY from the earlier 2.8% in June, implying that financial stability risks shifted to a minimum level.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Export data released a few days ago also suggested that manufacturers benefited by the Peso weakening. Exports expanded 4.3% YoY, the fastest pace this year.Source: Bloomberg, FXPRIMUS Click the image to enlarge
The Philippine Exporters Confederation Inc. President Sergio Ortiz-Luis expects that the export growth target in 2013 will reach 10%, meaning that average export growth needs to hit at least 15%. The leading industry could be its garments sector, since orders are up by 100%.
The Peso extended its weakening against the Greenback since the middle of May. Officials should be satisfied with the exchange rate as long as it stays within the 42-44 levels. Hence, the current exchange level cheers the Bangko Sentral ng Pilipinas (BSP), while inflation concern doesn’t apply at this moment.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Capital outflow remains top challenge for economy, together with slowing China
Actual capital outflow remains the top challenge for the Philippine financial stability environment. The Philippine Stock Exchange Index (PSEi) rallied more than 270% since Federal Reserve’s (Fed) first round of mega stimulus in 2009, while the currency still appreciated against the Greenback more than 50% from then. A large percentage of these capitals is speculative and short-term, which means the financial market will be extremely vulnerable to any external condition changes, such as the Fed’s policy adjustment.
Compared to its ASEAN neighbours, the Philippines’ advantage is the expansion of foreign ownership rights, aiming to increase foreign direct investment (FDI). However, the country’s priority is to boost its infrastructure investment, like China did in the past decade. Raising the policy rate doesn’t solve the problem, the recent BI’s tool is a great example, and it may slow growth in the end. The current FDI in the Philippines still lags behind its ASEAN neighbours.
China is another threat to the Philippine economy, given the rising trade relationship between the two. With recent familiar topics, a successful reform in China will play a key role for the Philippines in a longer run. I also do not expect any impact in the near term, at least before 2016.
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