YEARENDER: Monetary authorities gear up for new challenges in 2012

MANILA, Philippines – Monetary authorities are gearing up for more economic uncertainties next year as growth in emerging East Asia is expected to remain weak due to the global economic crisis.

Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the necessary economic, fiscal, and financial reforms that are crucial to restoring the sustainability of a balanced global growth should be put in place sooner rather than later after the economic gains achieved two years ago stalled last year and as the 2012 global outlook has deteriorated.

“Although we know there are no quick fixes, analysts have long warned against kicking the can down the road for too long,” Tetangco stressed.

He pointed out that the heightened debt crisis in Europe could escalate into deleveraging in the banking and corporate sectors resulting in global credit and liquidity tightening while the weak US labor market could pull down global demand prospects.

He added that an economic slowdown in China could result in the loss of a critical driver of growth not only for the region but also globally.

Economic woes

Tetangco likened 2011 to a blockbuster movie due to the persistent structural frailties in the US and euro zone that have weighed against global activity, the spread of geo-political unrests among oil-producing countries that has resulted in commodity price pressures, and the devastating calamity in Japan and Thailand that disrupted the global supply chain.

“If we liken 2011 to a movie, we can say it has all the elements of a blockbuster. We’ve witnessed suspense, drama, comedy, even some love-hate episodes among heads of state, and between heads of state and their constituents. 2011 surely has had its share of twists and turns. Indeed this year has kept all of us, the policymakers and media correspondents alike, on our toes,” he stressed.

For the entire year, he explained that monetary authorities all over the world operated under a “Risk on/Risk off” environment.

The BSP raised interest rates by 50 basis points this year bringing the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent. Authorities raised policy rates by 25 basis points last March 24 and by another 25 basis points last May 5 as a preemptive move to keep inflation expectations well anchored amid the escalating price of oil in the world market.

The policy rate setting body, however, kept interest rates steady but raised the reserve requirement ratio for banks last June 16 and July 28 by a cumulative 200 basis points to 21 percent from 19 percent to siphon off P70 billion from the financial system and curb additional inflationary pressures arising from excess liquidity brought about by strong inflow of foreign capital.

During the policy-rate setting meeting of the BPS last Dec. 1, monetary authorities raised to 4.52 percent instead of 4.46 percent this year, to 3.51 percent instead of 3.05 percent next year, and to 3.12 percent instead of 3.02 percent for 2013 due to the impact of the typhoons as well as the impending fare hike for the MRT and LRT system.

Inflation eased to 4.7 percent in November after peaking at 5.3 percent in October boosting the chances of a possible reduction in interest rates by the BSP early next year due to manageable inflation as well as slower than expected domestic economic growth. Based on 2006 prices, the National Statistics Office (NSO) said inflation averaged 4.8 percent in November from 5.2 percent in October bringing the average inflation to 4.8 percent in the first 11 months of the year.

Weaker-than-expected GDP growth

Recent data from the National Statistical Coordination Board (NSCB) showed that the country’s gross domestic product (GDP) growth slackened to 3.2 percent in the third quarter of the year from 7.3 percent in the same quarter last year bringing the GDP expansion to 3.6 percent in the first three quarters of the year.

This makes it impossible to achieve the revised GDP growth of 4.5 percent to 5.5 percent set by the Cabinet-level Development Budget Coordination Committee (DBCC). The body originally penciled a GDP growth of seven percent to eight percent that was later scaled down to five percent to six percent.

“Fortunately, it’s so far been relatively good for the Philippines. Although economic growth has slowed, we have not yet seen a contraction. Our assessment is that the country’s structural economic make-up is self-sustaining,” he added.

He explained that the Philippines is not immune from the risks arising from the anemic US economic growth as well as the debt crisis in Europe and could be affected in the areas of trade, services particularly the business process outsourcing (BPO) sector, remittances from overseas Filipinos, investments, and even official development assistance (ODA) loans.

Lower growth

Multilateral lender International Monetary Fund (IMF) has slashed anew the economic growth forecasts and the inflation projections for the Philippines this year and next year in light of the lower-than-expected growth in the third quarter of the year amid the weak global trade and underspending by the Aquino administration as well as the debt crisis in the US and Europe.

IMF mission chief Vivek Arora said the agency is now seeing the country’s GDP expanding by 3.7 percent instead of 4.7 percent this year and by 4.2 percent instead of 4.9 percent next year.

“GDP growth slowed in the first three quarters of 2011 owing to a fall in semiconductor exports and a temporary fall in public investments as new practices are put in place to improve the transparency and efficiency in government expenditure,” Arora stressed.

For 2012, the IMF said the country’s GDP growth would recover to 4.2 percent as public spending are expected to improve after a dropping this year while private demand would remain resilient.

“The Philippines is being affected along with other countries in the region by the fragile global environment, but macroeconomic conditions remain generally sound,” Arora added.

On the other hand, the World Bank likewise lowered its growth forecast for the Philippines anew to 3.7 percent instead of 4.2 percent and to 4.2 percent instead of 4.8 percent next year as low public spending and weak global demand weighed down the national output in the first three quarters of the year.

In order to grow above five percent in the years to come, World Bank economist Karl Kendrick Chua said the Philippines needed reforms to address structural bottlenecks in the economy. This would include measures to raise revenue for higher spending on infrastructure, health, education and social protection as well as simplifying business regulations to encourage entrepreneurship and job creation.

“A stronger structural underpinning would allow the country to deal with shocks more effectively, achieve more inclusive growth and reduce poverty at a faster Likewise, the Asian Development Bank (ADB) has revised downward its growth forecasts for the Philippines to 3.7 percent instead of 4.7 percent for 2011 and to 4.8 percent instead of 5.1 percent for 2012 as economic concerns continue to hound the US and Europe.

Positive credit rating actions

The Philippines has received five positive credit rating actions from international credit rating agencies led by Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings since President Aquino assumed office 18 months ago.

S&P recently upgraded the credit rating outlook of the Philippines to positive from stable signalling a possible upward revision in the country’s credit rating over the next 12 months. It raised the credit rating of the Philippines to two notches below investment grade from three notches last Nov. 12 of last year on the back of the country’s rising external liquidity.

Last January, Moody’s upgraded the country’s credit rating outlook to positive from stable paving the way to the upgrade of the country’s credit rating to two notches below investment grade.

This was immediately followed by Fitch that upgraded the country’s sovereign rating to one notch from two notches below investment grade last June 23 on the back of the country’s strong economic growth, improving fiscal position as well as robust external payments position.

With the rating actions, Fitch rates the country’s sovereign credit at one notch below investment grade while Moody’s as well as S&P rate the country’s sovereign credit at two notches below investment grade.

Challenges ahead

Tetangco said the BSP has proven that it is flexible and can swiftly adjust to a changing global environment to protect the gains on the inflation front and help support growth as necessary.

He pointed out that the BSP has the flexibility to ease its monetary policy stance in the first quarter of next year as inflation is on a downward trajectory.

“There will be more volatility in the markets and uncertainty before we see clarity in policy action and market behavior. The 2012 global outlook has undoubtedly become more serious. Nevertheless, the Philippine economy has underlying insulations that should mitigate the effects of global headwinds,” he said.

According to him, the country’s ability to manage its debt and pursue fiscal consolidation together with the resilient banking sector would help the country survive external shocks.

“The wheels of our economy are geared to help us weather the uncertainties in 2012. Our past efforts to clean up the banking system, exercise prudence in external debt management and continuing commitment to consolidate the fiscal sector currently allow us to leverage on our strengths,” he concluded. –Lawrence Agcaoili (The Philippine Star)