High US interest rates to impact PH economy

THE United States’ current round of interest rate hikes will have a detrimental impact on the Philippines’ economic indicators.

This is what international and local analysts told The Manila Times on Thursday after the US Federal Reserve (Fed) raised its Fed Funds Rate target by 75 basis points to 1.50 percent-1.75 percent on Wednesday, the largest increase since 1994, in an effort to cool the economy without triggering a recession.

Besides the obvious implications for Bangko Sentral ng Pilipinas’ (BSP) policy rate hikes, ING Bank Manila senior economist Nicholas Antonio Mapa believes the Fed’s aggressive tightening will likely translate to widespread United States dollar (USD) gain in the near future.

“Meanwhile, the hefty rate increases will likely lead to a stark slowdown in growth, with the Fed downgrading growth forecasts to 1.7 percent for this year and next. This could mean that the world economy will need to brace for a slowdown which, in turn, would translate to lower incomes and slower global trade,” he added.

Security Bank Corp. Assistant Vice President and economist Robert Dan Roces also said “there may be some pressure on our FX (foreign exchange) side, whereby levels may weaken the peso further.”

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Domini Velasquez, chief economist at China Banking Corp., shares the same view, saying that on a positive note, the BSP’s guidance on the pace of its monetary policy normalization should help ease market fears.

“Moving forward, we think that continued moderate hikes by the BSP will allow the economy to absorb interest rate increases at a more measured pace. In this time of uncertainty, it also provides time for the BSP to assess the impact of monetary tightening on our growth recovery,” she stressed.

For her part, Sophia Ng, a currency analyst at MUFG Bank Ltd., said the Fed’s rate move will affect government bonds and equities in addition to its impact to the Philippine peso (PHP).

“We also see risks of portfolio flows from the Philippines from this development, which is yet another negative factor for the PHP. USD/PHP now looks to head toward 54.00, much faster than what we have anticipated at the beginning of the year and will be a key level to watch,” she continued.

Ng also said that as global financial conditions tighten, government securities yields will surely rise, pushing 10-year yields beyond 7 percent this year.

Meanwhile, Michael Ricafort, chief economist at Rizal Commercial Banking Corp., believes that more aggressive Fed rate hikes may result in the likelihood of a US economic slowdown or perhaps recession as an unintended consequence of its efforts to combat high inflation.

“Since the US is the world’s biggest economy, a resulting economic slowdown or recession could also slow down the economy of many countries around the world, in terms of reduced global trade [exports, imports], investments, employment and other business/economic opportunities…,” he added.

On the other hand, DBS economist Han Teng Chua said, “A hawkish Fed is likely to keep the Philippine peso on the weak side against the US dollar, which would put upside pressure on imported inflation at a time of elevated global commodity prices.”

Finally, analysts at the Bank of the Philippines Islands (BPI) believe that increased peso pressure will eventually lead to higher inflation, noting that consumer prices are likely to be more sensitive to exchange rate movements now that the economy is becoming more reliant on imported goods such as oil, rice and pork.

The BPI analysts also warned that if the Bangko Sentral does not hike rates more aggressively, the country’s gross international reserves (GIR) will become more vulnerable.

“We expect a substantial decline in foreign reserves in this scenario,” they said, “as the BSP will have to sell dollars in order to temper the depreciation caused by the narrowing interest rate differentials.”

The analysts said if this happens, the country’s investment-grade credit rating may be jeopardized, as the Philippines’ solid external position is one of the reasons why rating agencies have not downgraded the country. If the government’s credit rating is downgraded, managing its finances will become more difficult.

Furthermore, they underscored that if the GIR falls significantly, long-term interest rates will likely rise even more, citing a negative link between dollar reserves and the 10-year yield.

“The benchmark rate usually goes up when the amount of imports and external debt that the GIR can cover goes down. Financing costs will become more expensive in the long term if the BSP doesn’t hike aggressively in the short term.”