Date
17 October 2017
Diwa Guinigundo says the Philippines has a healthy external payments position, low and stable inflation and a strong consumption-driven economy which differentiate it from its emerging market peers. Photo: Bloomberg
Diwa Guinigundo says the Philippines has a healthy external payments position, low and stable inflation and a strong consumption-driven economy which differentiate it from its emerging market peers. Photo: Bloomberg

Philippines to ride out shock from US rate rise, global downturn

The Philippines has enough firepower to fight shocks including excessive capital outflows should the US raise interest rates and the global economy falter.

Central bank deputy governor Diwa Guinigundo said the financial system will be able to “ride out these eventualities”, Bloomberg reports.

He said the country has a healthy external payments position, low and stable inflation and a strong consumption-driven economy which differentiate it from its emerging market peers.

That would make investors think twice about pulling their investment, he said.

The health of the global economy took center stage once again with G7 leaders on Friday pledging to use all available policy tools to boost demand as the recovery remains moderate and uneven.

With the Federal Reserve preparing to raise US rates as early as next month, Philippine policymakers are seeking to assure investors concerned about the economic credentials of incoming President Rodrigo Duterte.

Bangko Sentral ng Pilipinas may opt not to follow higher US rates and instead implement macroprudential measures to address risks in specific sectors, Guinigundo said.

Still, policymakers have space to adjust rates as needed depending on the outlook for inflation and growth, he said.

The central bank last week cut its benchmark rate to a record-low 3 percent, narrowed the band around it and introduced a new deposit tool, part of a new framework to strengthen policy transmission.

That was policy neutral and was intended to move low “sticky” market rates closer to the benchmark, Guinigundo said.

Policy makers will gradually increase the offer volume for the term deposit facility with the goal of shifting funds away from the overnight standing deposit facility, the deputy governor said while declining to give a specific amount.

“We want to have a longer hold on market liquidity,” Guinigundo said. The term deposits have seven- and 28-day tenors.

Inflation may quicken to close to 2 percent in June or July on higher oil prices and weather disturbances, Guinigundo said.

Consumer price gains may range from 1.1 percent to 1.9 percent this month, Governor Amando Tetangco said Friday.

The central bank targets inflation to average 2 percent to 4 percent in 2016 to 2018.

The central bank has also started a review of foreign exchange rules to see if there is scope for further liberalization including easing rules on documentation and handling debt-to-equity conversion, Guinigundo said.

Policymakers will also keep a market-determined exchange rate and will only intervene to smooth out excessive swings, he said.

“We assess financial markets that are primarily driven by sentiments about the US, but that isn’t the only factor to consider,” Guinigundo said.

“We’re concerned on financial stability and sustained growth. Right now, we have a lot of things that can offer support.”

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