Angelo Taningco
Economist, Treasury Group
The Philippines has started the year with a balance of payments (BOP) deficit and rapid peso depreciation alongside a jump in inflation. Concerns mount whether these would persist throughout the year given market expectations of US policy rate hikes with the first seen to start in March; looming trade deficits amid strong import demand to support domestic investment; and inflation seen to hover at the upper end of the government’s target range.
We think a monetary policy adjustment in the form of raising the policy rate will help ensure price stability as well as foreign exchange stability. Against this backdrop, we still believe that a 25 basis point hike in the BSP’s key interest rates will likely take place during the next monetary policy meeting of the BSP’s Monetary Board scheduled on 22 March. Meanwhile, we revised up our forecasts for end-year USD/PHP and average headline inflation to 52.00 and 4.0%, respectively, and maintained our full-year BOP deficit projection at −0.3% of GDP.
The BOP deficit stood at $531 million in January—the biggest since July—and a reversal from the December surplus of $917 million; note that this was reflected in the monthly drop of the BSP’s foreign reserves. A BOP deficit materialized last month despite foreign portfolio investments posting net inflows at $162 million; we conjecture this was largely precipitated by a trade deficit. We think this month may again result in a BOP deficit as shown by financial outflows stemming from the recent selloff in equity and fixed income markets. In absolute terms, we forecast a $1.2 billion BOP deficit this year on the basis of a bigger trade deficit and net outflows from the financial account. In relative terms, we think this is manageable as we estimate this to be only −0.3% of projected GDP. We think the BOP will be partly supported by overseas Filipinos (OF) cash remittances, which grew 4.3% last year following December’s above-than-expected 7.1% yoy growth to potentially expand by 5% this year. We also argue that higher domestic interest rates will help temper portfolio capital outflows and enable the BOP deficit to be at manageable levels.
We have observed a faster pace of peso depreciation and stronger volatility in the USD/PHP market since the beginning of the year. We estimated the rate of peso depreciation at 4.4% year-to-date (ytd) through 20 February—much higher than last year’s 0.4%—making it the worst performer among Asian currencies. The sharpest daily rate of peso depreciation that took place most recently was the 34 centavo increase in the USD/PHP on 19 February; we believe this surge was in reaction to the BSP’s announcement of a 1 percentage point cut in the reserve requirement ratio (RRR) to 19% (to take effect on 2 March) made on 15 February. (The market may have perceived this move by the BSP to be an easing of monetary policy. Though the central bank has emphasized that its RRR cut was an “operational adjustment” consistent with a more market-based monetary policy and capital market reforms. We surmise the additional P90 billion to be released from the RRR reduction will partly be absorbed by the term deposit facility (TDF) which recently had increasing offer volumes and a new 14-day tenor.) Likewise, we found the standard deviation of the daily USD/PHP to be higher ytd than last year. We think increasing domestic interest rates would slow down the peso depreciation and reduce foreign exchange volatility.
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