Phl economy showing signs of overheating — DBS

MANILA, Philippines -  DBS Bank Ltd of Singapore said the Philippines is displaying signs of overheating as credit growth has accelerated over the past two years.

In a research note titled “Philippine peso rates should be higher,” DBS said the country’s credit expansion has picked up over the past two years while inflationary pressures continue to build up.

“We think that Philippine peso interest rates may be vulnerable to a selloff when the carry environment eventually lifts. Fundamentally, the economy is already displaying signs of overheating,” the investment bank said.

It added the country’s interest rates have drifted sideways to slightly lower over the past few months as risk appetite generally held up.

The 10-year Philippine government yields retreated to five percent from resistance at 5.5 percent while two-year yields are hovering at 3.6 percent from 4.5 percent in the early part of the year.

The risk-taking environment has also driven the Philippines’ five-year US dollar credit default swap spread to a record low of 68 basis points on Aug. 8 from 110 basis points at the start of the year.

“The only sign of weakness lies with the Philippine peso, which is one of the worst performers in Asia this year,” DBS added.

The Singapore-based investment bank also noted that the country’s trade deficit continued to widen amid surging imports and could further erode the country current account balance that is now expected to end the year in a deficit.

“Under these conditions, Philippine peso interest rates should be higher, reflecting overheating risks. We think that Philippine peso interest rates are likely to drift higher in the coming months as global monetary policies become less accommodative,” the bank said.

Latest data from the Bangko Sentral ng Pilipinas showed liquidity in the financial system expanded faster at 13.2 percent in June from 11.3 percent in May while credit growth accelerated to 19 percent from 18.7 percent.

Luis Breuer, chief of mission of the International Monetary Fund  that arrived in Manila last July 26,  said the combination of rapid credit growth, buoyant private investment, and fiscal expansion could lead to overheating.

He said risks to economic growth in the Philippines are tilted on the downside and stem mainly from external sources such as spillovers from lower growth in China, the monetary policy tightening in the US as well as rising concerns about globalization in advanced economies.

He added other domestic risks include natural disasters and security-related events in some part of the country particularly in Marawi City.

Positive factors, on the other hand,  include the impending comprehensive tax reform program that could help fund higher infrastructure spending while the flexible exchange rate regime and strong fundamentals could help cushion the economy from external shocks.