Philippine Economy at Risk of Overheating


here’s an article from’s correspondent,

Philippine economy at risk of Overheating, says Deutsche Bank

MANILA – After a stellar performance in 2012, the Philippines is at risk of overheating, with inflation likely spiking in the next 12 months, Deutsche Bank said on Thursday.

In a briefing, Michael Spencer, Deutsche Bank chief economist for Asia Pacific, said the Philippines would grow by 5.5 percent this year, slower than the estimated 6.3 percent for 2012, because of base effects.

Even with this slowdown, Spencer said the Philippines may overheat, with inflation rising to an average of 4.6 percent from 3.2 percent last year.

“When we say an economy overheating, we’re talking about an economy growing faster than its long-run potential growth rate. And eventually putting the GDP level above the full employment level,” Spencer said, referring to gross domestic product (GDP) or the country’s total output.

In the third quarter, the Philippine economy expanded by a surprising 7.1 percent, which was the second-highest in the region, next to China.

Unemployment vs underemployment

Unemployment however rose in October, despite the high economic growth rate in the previous three-month period.

“The unemployment rate is in terms of level is [regionally] relatively high but in terms of level in the Philippine history it is near an all-time low,” Spencer said.

“So there are some concerns whether unemployment is correctly measured. We probably looking at a broader measure of underemployment, which is still very high but has been declining for the last three, four years now to a level, by Philippine standards, is relatively low,” he said.

In this regard, the Philippine job numbers present a relatively tight labor market, he said.

Spencer said the Philippine economy in the last three years has grown above its potential growth rate, opening a “significant positive output gap,” which is the difference between GDP and employment.

“What that means is it gets harder and harder to find workers for your shops, for your factories. You have to pay higher salaries because they have other alternatives,” Spencer said.

This then would lead to higher labor costs for businesses, accompanied by higher rent, as the economy continues to grow quickly. As businesses find their costs going up, they would have to pass them on to consumers in the form of higher prices of goods and services.

Spencer said the Philippines had a “surprisingly” low headline inflation figure, whereas its core inflation – which excludes food and energy – was higher.

“Prices for consumer durables are rising faster than headline CPI [consumer price index]. What’s really depressing inflation is very low food price inflation,” he said.

He said there is a “big anomaly” in the price of rice – a large part of the Philippines’ CPI basket – in the world market in the last two years. Historically, when there are price increases in corn, wheat and soybean – as what had happened recently due to adverse weather conditions – it does not take very long for rice to follow as people begin to stockpile the grain, driving prices up.

“And this has not happened this time around,” Spencer said, adding that even if the Philippines would not get a rice price shock, other goods and services would put pressure on inflation, which may climb even up to 5 percent in 2014.

By Deutsche Bank estimates, inflation in Asia has likely bottomed out with global food prices rising.

With that, Spencer sees the Bangko Sentral ng Pilipinas (BSP) hiking key interest rates by 75 basis points this year and another 75 basis points by 2014 before stabilizing by the second half of that year.

Accommodating stronger peso

Because the BSP would be forced to tighten its monetary policy – but much slower than they should – the country may see high capital inflows from abroad that would continue to prop up the peso to 38 against the US dollar by end of this year and to 36.5 by end-2014.

This makes the peso Deustche Bank’s favorite currency in the region, said Sameer Goel, head of Asia rates and currency research.

The peso has been supported by current account surpluses, averaging 4 percent of GDP in the last six years, which would likely rise in the coming years.

Goel said the peso’s appreciation has been driven by strong underlying fundamentals, thanks to strong OFW remittances and business process outsourcing.

This is not to say the BSP will take the rapid appreciation of the local currency sitting down. Spencer said monetary authorities will have many instruments in their arsenal to help mitigate the sudden strengthening of the peso.

“I am tremendously impressed by the ingenuity of the central banks in Asia. I don’t think there is a bottom to this [macroprudential regulation] barrel. There is a lot they can do,” Spencer said.

Pulling back on equities

Things may not go as well for the Philippine equities market as it is “worrisome” that some investors may look at it “at very stretched valuations.”

Some investors, which had been very overweight on Philippine companies, may pause and take a look at the more developed markets like the US and the euro zone, which had been showing signs of recovery.

Spencer said investors may pull back on the Philippines, which has been the most expensive market in Asia, and wait for company earnings to catch up with market valuations.

That said, the PSEi may correct from its high perch seen in the past few days, and just go sideways in the coming months as investors decide to take profit, he said.



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