Diokno says Philippines ready for sooner-than-expected rate hike in US

MANILA, Philippines — The specter of sooner-than-expected rate hike in the US is not bothering Bangko Sentral ng Pilipinas Governor Benjamin Diokno, believing the economy has enough buffers to withstand a capital flight from pandemic-depressed markets like the Philippines.

“Emerging economies are not homogenous group. Some may be badly affected by an earlier Fed rate hikes; others may be able to cope with it with little damage. The Philippines belong to the latter group,” Diokno said in a text message on Monday.  “We have sound fundamentals.”

The US Federal Reserve’s hawkish stance was initially broadly taken in stride by investors as the US central bank suggested it would not begin hiking until 2023, and would discuss winding down its bond-buying program later this year. But investors were spooked by comments from St. Louis Federal Reserve President James Bullard that liftoff could come as soon as late 2022 to prevent the US economy from overheating.

The hawkish signal from the US Fed is expected to be discussed once the BSP’s Monetary Board meets on Thursday. As it is, paranoia is high over a possible repeat of “taper tantrum” in 2013, which saw Asian markets panicking when the Fed announced it would undo its economic stimulus campaign following the 2008 financial crisis.

On Monday, the Philippine Stock Exchange index started the week down 0.35% while the peso weakened 0.5% against the US dollar. The selling continued elsewhere in Asia, with Tokyo stocks leading the way with a more than 3% fall, while Sydney shed more than 2%. Hong Kong, Seoul, Taipei and Jakarta all lost more than 1%, with Singapore and Wellington also in the red. Shanghai was flat.

PHL ‘has come a long way’

Should the Fed start its first post-pandemic tightening next year, the risk for the Philippines is that the BSP may be forced to follow suit to keep local yields competitive and stem capital outflows, all while the economy still needs all the support to recover from a pandemic-induced crash.

As it is, a premature rate hike, which would make credit costlier for pandemic-hit businesses and consumers, could derail the economy’s fragile revival. From flooring rates to record-low and lending money to the government, the BSP has been doing much of the heavy-lifting to salvage the economy from recession and compensate for the lack of a convincing fiscal response from economic managers.

But Diokno believes that unlike in past crises, the country “has come a long way.” Indeed, the Philippines is currently sitting on hefty dollar reserves that stood at $107.71 billion as of May. The buffer funds are forecast to hit a record $115.0 billion this year, before reaching $117.0 billion in 2022 based on the BSP’s latest projections. At the same time, the government also enjoys investment grade ratings that allow it to borrow money offshore at cheaper costs.

That said, Sanjay Mathur, economist at ANZ Research, agreed with the BSP chief, adding that even if the Fed begins raising rates next year, the Philippine economy “would have recovered considerably by then assuming the vaccinations are done.”

“Should the Fed move earlier also, I do not see much scope for the BSP to follow suit,” Mathur said in an e-mail. “What makes this episode different from say taper tantrum is (1) external position of the Philippines is much stronger and (2) if Fed hikes rates because the economy is strong, then there should be some growth feedback on Philippines including corporate,” he added.

For, Nicholas Mapa, senior economist at ING Bank in Manila, any pre-emptive moves to prepare for rate hikes in the US “may not work in the best interest of the economy.” But the BSP can only keep up the stimulus for so long, and Mapa said this should increase the urgency for the government “to get the economic ship in order as quickly as possible.”

“Will the Philippine economy be running red hot in mid 2022?  That’s the question that fiscal authorities will need to answer,” Mapa said in a separate email. — with a report from AFP