Philippines to Ride Out Fed Storm on Ample Buffers, Policy Space

Makati and Mandaluyong
Source: Getty Images
  • Central bank may decide not to follow U.S. action: Guinigundo
  • Strong fundamentals to differentiate Philippines from peers

The Philippines has enough firepower to fight shocks including excessive capital outflows should the U.S. raise interest rates and the global economy falter, central bank Deputy Governor Diwa Guinigundo said.

“We will be able to ride out these eventualities,” Guinigundo said in an interview on Friday at his office in Manila. "Healthy" external payments position, low and stable inflation and a strong consumption-driven economy differentiate the Philippines from its emerging market peers and may make investors think twice about pulling out of the Southeast Asian nation, he said.

Diwa Guinigundo
Diwa Guinigundo
Photographer: Edwin Tuyay/Bloomberg

The health of the global economy took center stage once again with Group of Seven leaders on Friday pledging to use all available policy tools to boost demand, as the recovery remains moderate and uneven. With the Federal Reserve preparing to raise U.S. rates as early as next month, Philippine policy makers are seeking to assure investors concerned about the economic credentials of incoming President Rodrigo Duterte.

Bangko Sentral ng Pilipinas may opt not to follow higher U.S. rates and instead implement macroprudential measures to address risks in specific sectors, Guinigundo said. Still, policy makers have space to adjust rates as needed depending on the outlook for inflation and growth, he said.

The central bank last week cut its benchmark rate to a record-low 3 percent, narrowed the band around it, and introduced a new deposit tool, part of a new framework to strengthen policy transmission. That was policy neutral and was intended to move low “sticky” market rates closer to the benchmark, Guinigundo said.

For a quick guide to the interest-rate corridor, click here.

Policy makers will gradually increase the offer volume for the term deposit facility with the goal of shifting funds away from the overnight standing deposit facility, the deputy governor said while declining to give a specific amount.

“We want to have a longer hold on market liquidity,” Guinigundo said. The term deposits have seven- and 28-day tenors.

Faster Inflation

Inflation may quicken to close to 2 percent in June or July on higher oil prices and weather disturbances, Guinigundo said. Consumer-price gains may range from 1.1 percent to 1.9 percent this month, Governor Amando Tetangco said Friday. The central bank targets inflation to average 2 percent to 4 percent in 2016 to 2018.

The central bank has also started a review of foreign exchange rules to see if there is scope for further liberalization including easing rules on documentation and handling debt-to-equity conversion, Guinigundo said. Policy makers will also keep a market-determined exchange rate and will only intervene to smooth out excessive swings, he said.

“We assess financial markets that are primarily driven by sentiments about the U.S., but that isn’t the only factor to consider,” Guinigundo said. “We’re concerned on financial stability and sustained growth. Right now, we have a lot of things that can offer support.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE