MANILA, Philippines - Risk aversion and deleveraging due to the global financial turmoil could increase interest rates which would mean higher borrowing costs for both the private and public sector, Bangko Sentral ng Pilpinas (BSP) Governor Amando Tetangco Jr. said in a speech before the Management Association of the Philippines (MAP).
“On the external front, slower inflows both portfolio and direct investments due to global deleveraging and risk aversion may imply both a weaker exchange rate and less favorable external financing conditions, for both the private and public sectors,” he said.
Tetangco also said that when interest rates increase, this would give the government less room to spend for basic needs.
“A rise in debt service costs means that fewer funds will be available for spending on key social services and infrastructure,” he said.
Latest data from BSP showed that foreign portfolio investments posted a net outflow of $198.7 million in February versus a net inflow of $835.23 million recorded in the same period last year.
Foreign direct investments, meanwhile, posted a net inflow of $1.52 billion in 2008, down from a net inflow of $2.9 billion in 2007.
Aside from deleveraging and risk aversion, Tetangco said the impact of the worldwide financial meltdown is also on exports and remittances.
“Recessionary trends in our major trading partners like the US and our Asian neighbors have slowly translated into slower demand for our products and services. In December and January, exports declined by more than 40 percent. Growth in remittances coursed through banks has slowed down to 0.1 percent in January. Remittances have thus far continued to hold up, but there are concerns that they may eventually succumb to the global slowdown, particularly as labor demand weakens in the host countries. These two fronts ultimately affect private consumption spending, which plays a big part in domestic economic growth,” he said.
In the financial system, credit is still growing at healthy levels. But the potential weakening of corporate and household finances could lead to deterioration in the quality of banks’ loan portfolios.
On the fiscal sector, he said that reduced collections from income would impact on the National Government’s ability to pursue its economic resiliency package.
The government expects to incur a budget deficit of P177.2 billion this year from an earlier program of P102 billion.