Stark contrasts

DURING its meeting on September 12, the Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), decided to keep its policy rates steady, citing the manageable inflation environment, which has been at 2.8 percent for the first eight months of 2013, well below the BSP’s target of 3 percent to 5 percent.

Based on the board’s decision, the BSP’s overnight borrowing and lending rates stay at 3.5 percent and 5.5 percent, respectively. These policy rates are used by private banks in setting their own lending rates, which means interest rates on loans for consumer items or business activities should also stay low.

For the BSP, keeping the policy rates unchanged provides it with the flexibility to support the country’s robust economic growth. Growth in terms of gross domestic product (GDP) averaged 7.6 percent for the first half of 2013, matching China’s growth in the same period and outpacing other Southeast Asian economies.

The Philippines’s shining position is in stark contrast to what is happening in other economies in Asia, including other members of the Association of Southeast Asian Nations (Asean).

Also on September 12 Bank Indonesia (the Indonesian counterpart of our BSP) raised its benchmark interest rate by 25 basis points to 7.25 percent. It was the second increase in the past two weeks, and was aimed at defending the rupiah. At the same time, Bank Indonesia lowered its 2013 GDP growth forecast to 5.5 percent to 5.9 percent from its earlier projection of 5.8 percent to 6.2 percent.

Indonesia is not an isolated case. Other emerging economies are adversely affected by concerns that the US Federal Reserve (the Fed) may reduce its bond-buying program, known as quantitative easing (QE), which, until recently, brought massive capital flows to these emerging economies.

A Reuters report that was published online on August 11 said that, with international reserves sufficient to pay for only seven months of imports, $172 billion of debt payable within the current fiscal year and weak capital inflows, India was in a weak position to defend a falling rupee. India, heavily dependent on imported energy, gold and technology, had been attracting foreign creditors, which invested in its stocks and bonds.

Like in other emerging economies, however, the outflow of capital from these economies in anticipation of the winding down of the Fed’s QE program is also affecting India’s capability to defend its currency, which has fallen by 12 percent since May and hit a record low of 61.80 to the dollar in the first week of August, according to the Reuters report.

Reuters also cited HFDC Bank, which forecast India’s balance of payments to post a deficit of $12 billion to $15 billion in the fiscal year 2013 to 2014. In another report, CNN Money said India’s GDP grew by 4.4 percent in the second quarter of this year, its slowest quarterly growth since 2009.

In other online news, dawn.com reported that Thailand’s National Economic and Social Development Board this month lowered its GDP growth forecast for 2013 to 3.8 percent to 4.3 percent from its earlier target of 4.2 percent to 5.2 percent.

Thailand’s economy, which grew by 6.4 percent in 2012, is now in recession after two consecutive quarters of contractions: by 1.7 percent in the first quarter and by 0.3 percent in the second quarter. The downgrading of the GDP-growth target triggered a depreciation of the baht to 32.12 to the dollar, its lowest in three years.

The country’s current account, on the other hand, stood at a deficit of $5.1 billion in the second quarter, a reversal from a $1.3-billion surplus in the first quarter.

In Washington the International Monetary Fund (IMF) warned the Group of 20 (G-20) on September 4 that emerging economies were slowing down more than expected and were under pressure from the reduction of the US stimulus program. In a report for the G-20, comprised of the world’s richest economies, the IMF cited Brazil, China and India as mainly responsible for the loss of some 2.5 percentage points in emerging-economy growth since 2010 levels.

The IMF said investors had been pulling out of emerging economies since May, when the Fed began signaling it would taper its $85-billion monthly bond purchases if the US economy continued to improve broadly. According to the report, emerging economies were hardest hit following the Fed’s remarks.

The IMF said a slowdown in the bond-buying program could trigger exchange-rate and financial-market overshooting in emerging-market economies at a time when these economies are trying to cope with rising domestic vulnerabilities and slower growth. –Manny B. Villar, Businessmirror

To be continued