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BSP says risks are ‘growing pains’

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By Melissa Luz T. Lopez
Senior Reporter

THE PHILIPPINES has ample policy space to respond to persistent threats of surging inflation, a weaker peso and a growing trade gap, a senior central bank official said, describing such concerns as “growing pains” for the economy.

Bangko Sentral ng Pilipinas (BSP) Assistant Governor Restituto C. Cruz said the Philippines remains well-positioned to sustain robust economic growth, even in the face of economic woes weighing down market sentiment.

Mr. Cruz filled in for BSP Governor Nestor A. Espenilla, Jr. at the event as the latter extended his medical leave for two weeks.

The senior central bank official said the economy will sustain above-six percent growth with “strong” structural dollar inflows, even in the face of a widening current account deficit. Remittances from overseas Filipino workers business process outsourcing revenues as well as tourism receipts will keep flowing in, adding to the economic boost of last semester’s 42.4% surge in foreign direct investment net inflows.

The current account posted a $3.1 billion deficit as of end-June, compared to the $133-million gap in 2017’s first half and already matching the BSP’s full-year estimate for 2018.

However, he maintained that the deficit is “largely reflective of the economy’s strength,” as a surge in capital imports will eventually translate to improved productivity.

“Over time, as investment-led economic activities result in the expansion of the economy’s potential capacity and support the needed infrastructure development, there can be subsequent rise in goods exports, eventually alleviating the current account deficit,” Mr. Cruz said in a speech during The Asset 13th Philippine Forum on Wednesday.

The wider trade gap has also added to a risk-off attitude taken by market players towards the peso, which has depreciated by roughly eight percent versus the dollar year-to-date.

Unrelenting inflation has also been flagged as a major concern, although the central bank official pointed out that such price shocks continue to be supply-driven.

“These three major developments can be seen as ‘growing pains’ or the adjustments that the domestic economy has to endure as it moves to a higher plane of growth,” Mr. Cruz said.

“Should potential risks emanating from these outcomes materialize, the Philippines has ample policy space to respond.”

Prices of widely used goods rose by 6.4% in August, marking a nine-year high amid scarce supply of rice, vegetables, meat and fish, as well as rising global oil prices. September inflation is expected to clock in even higher at 6.8%, based on estimates of the BSP and BusinessWorld’s poll of economists last year.

In response, the BSP raised rates by another 50 basis points (bp) last week amid signs that inflation could log a fresh multiyear high in September. The central bank has hiked benchmark yields by a cumulative 150 bp since May to douse inflation expectations and show a strong hand to commit to bringing the pace of price increases back to the 2-4% target range.

The latest rate hike is expected to lend support to the peso, which has been trading weaker than P54 to $1 in recent weeks.