Inflation seen at 3% by yearend

MANILA, Philippines - The country’s inflation rate is expected to hit three percent by the end of 2013 or still within the government’s target range as stable crude oil prices will keep inflation in check, according to First Metro Investments Corp.

In its latest Market Call report, FMIC said the devastation wrought by Super Typhoon Yolanda would push up inflation in the fourth quarter but this would not last long as prices of food and world crude oil stabilize.

FMIC said the amount of supply coming online in the coming years would likely push oil prices down. The US has been producing around seven million barrels per day for the last several years and is seen to increase this to 12 million b/d by the end of this decade.

Aside from the US, Canada and Eastern European countries have also been stepping up crude oil production.

“Headline inflation averaged at 2.4 percent in third quarter on the face of the slower pace in the rise of crude oil prices. This will certainly rise in the fourth quarter, exacerbated by the super typhoon’s effects in the Visayas, but steady to lower crude oil prices would pull down inflation to 3.3 percent in fourth quarter, which would bring full-year inflation to three percent, at the low end of the BSP’s target,” FMIC said.

FMIC said remittances from Filipinos working abroad would continue to be strong due to the steady demand for Filipino labor across the world.

According to the Philippine Overseas Employment Administration,  approved job orders reached 542,367 in January to August, 39 percent of which were processed job orders for services, production, professional, technical and related workers intended to work in Saudi Arabia, the United Arab Emirates, Kuwait, Taiwan, Hong Kong and Qatar.

Workers with processed contracts stood at 1.16 million in the first half of the year.

“OFW remittances will be a positive factor for the economy in the second half due to the depreciation of the peso, and should continue to do so into the fourth quarter,” FMIC said.

FMIC said it does not see the peso appreciating significantly given the outflow of funds from emerging markets.

As for bond yields, FMIC said domestic rates will remain low until March next year when the US Federal Reserve starts tapering its quantitative easing program.

“What may influence bond yields more is if the inflation rate accelerates towards the mid-point of the BSP’s three to five percent target,” FMIC said.

The investment house expects long line of corporate bond issuances until the end of the year, and probably into the first quarter of 2014 to take advantage of the prevailing low interest rates.  “We also think new names will emerge in this rush to catch what many see as a bottom in interest rates during that period,” FMIC said.