Economic Analysis - BSP Likely To Hike In 2018 To Safeguard Macro Stability - FEB 2018


BMI View: As expected, the BSP kept its monetary policy on hold at its last meeting of 2017 on December 14 . We maintain our forecast for the Philippine central bank to hike its policy rates by 50bps to 3.50% by end-2018 in the face of rising inflationary pressures, rapid credit growth, and a continued hawkish US Fed.

In line with our expectations, the Bangko Sentral Ng Pilipinas (BSP) left its benchmark overnight reverse repurchase (RRP) facility rate unchanged at 3.00% at its last monetary policy meeting for 2017 on December 14. The corresponding interest rates on the overnight lending and deposit facilities were also kept steady at 2.50% and 3.50%, respectively, while the reserve requirement ratio was maintained at 20.00%. Although headline inflation has been anchored within the central bank's target of 3+-1%, we maintain our view that the current monetary policy stance is too loose and has already started to result in a build-up of economic distortions with credit growth surging and core inflation on a sustained uptrend. Given that the real interest rates differential with the US is likely to narrow further as the US Fed continues to hike rates in 2018, we forecast the BSP to follow suit and raise its RRP by 50bps to 3.50% by end-2018.

Rate Hikes On The Horizon
Philippines - Central Bank Watch
Source: BMI, Bloomberg

Inflation Set To Head Higher In Coming Months

Consumer price inflation (CPI) has been within the BSP's target range of 3+-1%, with both headline and core inflation coming in at 3.3% y-o-y in November 2017 (versus 3.5% y-o-y and 3.2% y-o-y, respectively, in October), providing it some leeway to maintain a loose monetary policy. However, we expect inflation to face upside pressures over the coming months due to strong credit growth (which came in at 16.1% y-o-y in October) and higher commodity prices amid a strong economic growth environment. We are forecasting inflation to average 4.0% in 2018 and this means that real interest rates will dip into negative territory.

Inflationary Pressures On The Rise
Philippines - Inflation, %
BMI, PSA

The Philippine peso has been one of the worst performing currencies in the region (depreciating by 2.1% against the USD in the first 11 months of 2017). With the US Fed set to continue on its rate hiking cycle, flagging three more possible 25bps hikes in 2018 at its December meeting, we believe that the BSP is likely to tighten monetary policy in the coming months in an effort to safeguard safeguard currency and macroeconomic stability.

PHP Has Underperformed Considerably
Philippines - Exchange Rate, USD/PHP And ADXY
Source: BMI, Bloomberg
Macroeconomic Forecasts (Philippines 2013-2019)
Indicator 2013 2014 2015e 2016e 2017f 2018f 2019f
National Sources/BMI
Nominal GDP, USDbn 267.3 285.8 294.4 312.8 317.4 347.1 386.2
Real GDP growth, % y-o-y 7.2 6.0 5.9 6.8 6.7 6.3 6.2
GDP per capita, USD 2,716 2,855 2,891 3,021 3,016 3,245 3,554
Industrial production, % y-o-y, ave 13.9 7.3 2.5 11.7 4.1 6.6 6.5
Population, mn 98.48 100.10 101.72 103.32 104.92 106.51 108.11
Consumer price inflation, % y-o-y, eop 4.1 2.7 1.5 2.6 4.0 4.0 4.0
Consumer price inflation, % y-o-y, ave 3.0 4.1 1.5 1.7 3.3 4.0 4.0
Central bank policy rate, % eop 3.50 4.00 4.00 3.00 3.00 3.50 3.50
Exchange rate PHP/USD, ave 43.20 44.20 45.20 46.20 50.20 50.75 50.37
Exchange rate PHP/USD, eop 44.40 44.72 46.91 49.60 51.00 50.50 50.25
Budget balance, PHPbn -164.1 -73.1 -121.7 -353.4 -428.8 -508.8 -569.8
Budget balance, % of GDP -1.4 -0.6 -0.9 -2.4 -2.7 -2.9 -2.9
Goods and services exports, USDbn 67.8 74.7 71.4 74.0 84.7 94.7 104.8
Goods and services imports, USDbn 78.5 87.1 88.9 102.5 115.8 128.9 142.1
Current account balance, USDbn 11.4 10.8 8.4 -1.0 -1.1 -1.5 -1.4
Current account balance, % of GDP 4.3 3.8 2.9 -0.3 -0.3 -0.4 -0.4
Foreign reserves ex gold, USDbn 75.7 72.1 74.0 73.4 72.4 70.9 70.9
Import cover, months 11.6 9.9 10.0 8.6 7.5 6.6 6.6
Total external debt stock, USDbn 66.2 78.6 80.6 77.3 78.4 79.6 80.8
Total external debt stock, % of GDP 24.8 27.5 27.4 24.7 24.7 22.9 20.9
Crude, NGPL & other liquids prod, 000b/d 38.0 41.0 27.0 23.0 21.9 20.9 21.4
Total net oil exports (crude & products), 000b/d -280.5 -284.5 -334.5 -361.5 -401.3 -432.1 -458.9
Dry natural gas production, bcm 3.7 3.7 3.5 3.9 3.7 3.0 2.4
Dry natural gas consumption, bcm 3.7 3.7 3.5 3.9 3.7 4.1 4.5