Banks Seen Keeping Policy Support on Growth Risk: Southeast Asia

The Philippines and Indonesia will probably refrain from monetary tightening to protect their economies from a regional growth slowdown that’s sparked capital outflows and driven down stocks and currencies.

Bangko Sentral ng Pilipinas may lower the rate on its special deposit accounts for a fourth time on June 13, while keeping the benchmark overnight rate at 3.5 percent, according to a Bloomberg News survey. Bank Indonesia Governor Agus Martowardojo, who presides over his first policy meeting the same day, will hold the reference rate at 5.75 percent, according to all 19 economists surveyed by Bloomberg.

Slowing inflation from China to India and Indonesia’s delay in implementing a planned fuel-price increase have provided scope for policy makers as the global recovery falters. South Korea will probably hold borrowing costs at 2.5 percent this week after cutting in May, as speculation the U.S. may reduce stimulus weakens regional currencies including the peso and won.

“Central banks in the region have scope to extend their accommodative policies with inflation remaining benign,” said Glenn Levine, a senior economist at Moody’s Analytics in Sydney. “Most economies will remain below potential until we see a stronger recovery in the U.S. and in Europe, which we don’t expect until 2014.”

International money managers pulled about $2.3 billion from Southeast Asia after Federal Reserve Chairman Ben S. Bernanke said May 22 policy makers could consider scaling back stimulus if the employment outlook shows sustainable improvement.

The Philippine stock index has fallen 6.9 percent since then, while the peso has dropped 3.8 percent. Indonesia’s rupiah forwards slid yesterday to the weakest level since August 2009.

Bubble Risks

Indonesian President Susilo Bambang Yudhoyono is battling a persistent current-account deficit that’s hurt the rupiah, while the economy expanded last quarter at the weakest pace in more than two years. The government plans to raise fuel prices after completing its 2013 budget revisions by June 17, Coordinating Minister for the Economy Hatta Rajasa said last week. Protests derailed plans to increase the fuel costs last year.

The central bank is “moving toward a tightening bias” as the planned fuel-price increase adds risks to inflation and economic stability, Deputy Governor Perry Warjiyo said May 22. Using the benchmark rate would be the “most credible” response to damp price expectations, Deputy Governor Halim Alamsyah said last week.

Investment Grade

Still, “the BI rate policy will likely hinge on the fuel price decision,” said Helmi Arman, an economist at Citigroup Inc., who predicts no change in the reference rate this week. He forecasts the central bank will raise its benchmark and the rate it pays lenders on overnight deposits, known as the Fasbi, after a fuel-price increase is implemented.

The Philippines, which won its first investment-grade rankings from Fitch Ratings and Standard and Poor’s this year, has stepped up efforts to slow capital inflows and avert asset-bubble risks. Policy makers have cut the SDA rate three times this year and relaxed curbs on dollar purchases.

Bangko Sentral is considering further curbs on property loans to prevent a bubble, and will assess the need for more adjustments to SDAs, Governor Amando Tetangco said last month. SDAs held 1.9 trillion pesos ($44 billion) as of May 17, more than six times the 286 billion pesos in the overnight facility.

The central bank will probably lower the SDA rate to 1.5 percent from 2 percent, according to seven of 16 economists surveyed, with two predicting a cut to 1.75 percent, and the rest forecasting no change. Policy makers will keep the benchmark overnight rate at 3.5 percent, according to all 20 economists surveyed.

Philippine growth was among the fastest in Asia last quarter, with gross domestic product rising 7.8 percent from a year earlier, as President Benigno Aquino boosted spending and investment surged. Ayala Land Inc., DMCI Holdings Inc. and Megaworld Corp. are among companies building homes and offices.

Domestic Demand

“Given the existing strength of domestic demand, further cuts to the SDA rate could place the economy at risk of overheating,” said Philip McNicholas, an economist at BNP Paribas SA in Hong Kong. While the BSP will keep its rates on hold, “slowing regional growth may prompt a more cautious tone.”

China’s trade, inflation and lending data for May trailed estimates, signaling weaker global and domestic demand. The South Korean central bank will probably keep its benchmark rate unchanged on June 13, all 15 economists predict.

To contact the reporters on this story: Karl Lester M. Yap in Manila at; Michael Munoz in Hong Kong at

To contact the editor responsible for this story: Stephanie Phang at

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