Faster GDP growth seen as demand holds up

Growth in the Philippines probably matched or exceeded the 6.9% pace in the first quarter that made it one of the fastest-expanding emerging markets, according to the central bank governor.

"Based on leading indicators, we believe that the rate of growth will continue, so it is going to be about the same, if not better" in the second quarter, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. said in an interview on Monday in Bali, where he attended a conference of global central bankers.

"Exports have slowed but domestic sources of growth continue to be strong."

The Philippines expanded at the fastest pace in almost three years in the first quarter, spurred by spending ahead of the May 9 national elections.

The government of new President Rodrigo R. Duterte is forecasting economic growth of 6-7% this year.

Central banks in Asia, from Indonesia to South Korea, have been easing policy this year to counter a slowdown in the global economy and the fallout from Britain's shock vote to exit the European Union in June.

The Philippines central bank lowered its benchmark rate to 3% in May as part of an overhaul of its policy framework.

"We believe we have enough policy space to deal with exogenous shocks," Mr. Tetangco said.

A dovish turn by the US Federal Reserve earlier this year has helped reverse risk aversion on global markets and send capital flows back to the Philippines, he said.

While some of the inflows may be short term in nature, the central bank is well-placed to absorb their impact, according to the governor. The likelihood of fewer-than-expected US rate hikes coupled with Japan's moves to stimulate growth are soothing nerves, Mr. Tetangco said.

"Both of these moves have been quite positive for the market and have led to some risk-on behavior again," he said. "As a result we have seen capital flow back to emerging markets, including the Philippines. The capital flows are providing liquidity to the financial system."

Mr. Duterte pledged in his first state of the nation speech last week to improve on the economic policies of his predecessor, including lowering taxes and easing restrictions on foreign investment. Mr. Tetangco said the government's plan to spend more on infrastructure will be a positive for the economy.

The central bank is also seeking to bolster the reputation of its financial system following the disappearance of $81 million of reserves owned by Bangladesh via the Philippines. Thieves hacked into the account of the Bangladesh central bank at the US Federal Reserve and routed the funds to accounts at Manila-based Rizal Commercial Banking Corp.

Mr. Tetangco made it clear that banks themselves have to play a central role in enforcing anti-money laundering rules.

"The powers have always been there," he said. "It's a matter of the banks complying with the regulations. At the end of the day, the banks as well as the public need to guard against" cyber crime and hacking, he said.

The BSP in June revoked the license of Philrem Service Corp., the remittance company linked to the transfer of the stolen funds to local casinos. The company has appealed against the ruling. Two other remittance firms also face similar penalties.

CAPITAL INFLOWS

The Philippines also stands to gain from advanced economies' lackluster growth as investors look to emerging markets for better returns, a senior BSP official said separately.

Slower-than-expected growth in the United States, a disappointing monetary stimulus package in Japan and weaker prospects in Europe in the aftermath of the United Kingdom's June 23 vote to leave the European Union are pushing capital out of these major economies to those displaying robust expansion, BSP Deputy Governor Diwa C. Guinigundo said.

"We are seeing manifestations of search for yields, and the Philippines among the emerging markets is a very good destination. We are seeing this today in terms of sustained strong inflows of foreign capital in the last two months, at least," Mr. Guinigundo said on the sidelines of an exhibit launch at the Senate on Monday.

Foreign portfolio investments -- also called "hot money" given the ease by which the funds enter and leave markets -- sustained consecutive weekly net inflows following the May 9 elections, according to central bank data. From January to July 15, hot money net inflows stood at $773.77 million, compared to the $422.77 million recorded in 2015's comparable period.

"One of the reasons is we see some remote possibility at this point that monetary policy will be tightened in the US. Of course we know that in the US, a less-than-expected growth rate was announced. That disappointed the markets and the US Fed, and now they're talking about a September 2017 policy adjustment," Mr. Guinigundo noted.

Reuters reported a 1.2% growth estimate for the US in the second quarter, against the Fed's expectations of a 2% expansion. This has fueled talks that the monetary authorities there may step back from earlier statements of two more rate hikes this year given paling prospects.

Mr. Guinigundo cited weak US growth as a key "push factor" for capital flows and which also led the peso to strengthen against the greenback.

The US Federal Reserve last hiked interest rates in December by 25 basis points after nearly a decade of near-zero levels, amid signs that economic recovery was picking up. The Federal Open Market Committee kept rates unchanged during its July 26-27 meeting, with Fed chair Janet L. Yellen saying that risks to the US' economic outlook have "diminished."

Growth prospects across Europe also remain weak, coming after the United Kingdom's decision to leave the European Union in June, Mr. Guinigundo said, alongside a tamer response by the Bank of Japan to Prime Minister Shinzo Abe's call for increased stimulus for their economy.

Back home, the BSP has stood pat on monetary policy following operational tweaks introduced on June 3 that ushered in the formal shift to an interest rate corridor scheme. Economists widely believe that the central bank will hold off any adjustments until next year, as strong domestic activity and benign inflation render current rates appropriate.

Growth is expected to have picked up last quarter coming from January-March's 6.9% clip, Mr. Guinigundo said, backed by strong public spending seen from April-June and a steady rise in money supply.

"The ingredients of sustained economic growth are there. We expect to see the same ample liquidity in the system that would allow economic growth to be sustained," added the central bank official.

In a market commentary, ING Bank N.V. Manila senior economist Jose Mario I. Cuyegkeng said the Monetary Board is likely to keep policy steady for the rest of the year given "no compelling reason" to adjust, as liquidity growth remains ample and economic growth poised to hover at around 6% for the next few years, possibly even at a faster clip.

"A strong execution of government's spending program that affects not only the industrial and service sectors but also agriculture and the rural sectors could see Philippine growth expand at a faster rate and beat the previous administration's 6% average growth," Mr. Cuyegkeng said in his market view.

Source: Business World Online