Higher interest rates loom as Duterte takes over
Prinz Magtulis (The Philippine Star) - June 1, 2016 - 12:00am

MANILA, Philippines – Despite investors cheering election success, they are still unlikely to grant the Duterte administration cheaper funding compared with that of President Aquino for big-ticket projects, analysts said.

With oil prices rebounding and interest rates likely to follow suit once the US moves, it would be optimal for the next government to accelerate capital outlays it promised to accelerate.

“I do see a marginal increase in domestic borrowing costs, but still not very far from where they are now,” said Nicholas Antonio Mapa, economist at Bank of the Philippine Islands.

“Duterte must really hit the ground running as a (second) Fed rate hike may foment possible rise in domestic interest rates,” Mapa said.

Aquino is ending his six-year term with US Federal Reserve chair Janet Yellen warning a hike in US rates is likely in “the coming months.”

That may turn the tide not only for investors flocking to Asia, but also in domestic rates which the Bangko Sentral ng Pilipinas (BSP) has kept steady for 13 straight meetings for now.

On top of that, oil prices are recovering some lost ground in recent weeks threatening to spur inflation. From a low of around $20 a barrel last January, crude prices are now hovering around $50.

In fact, the value of oil imports grew 19 percent in March, the first time it did so since at least December, Bureau of Customs data showed.

Oil revenue collections remained down 17.9 percent that month and 17.3 percent in the first quarter.

Duterte may face financing problems as early as January next year, according to Justino Calaycay Jr. of brokerage Accord Capital Equities Corp.

However, this could be partly offset if the country’s credit ratings are maintained.

“If no major shake-up happens in the way the economy is run...we will still be able to access relatively low financing costs. The challenge...is to maintain the fiscal discipline that was the hallmark of President Aquino’s team,” he said in an e-mail.

Cosette Canilao, former head of the Public-Private Partnership (PPP) Center, agreed. “The policies and programs the new DOF will pursue will spell out the magnitude of such rate increase,” she said.

Under Duterte’s economic agenda, the Department of Finance (DOF) is said to pursue reforming the country’s tax system by lowering taxes for the middle class and raising them for the high-earners.

This comes as infrastructure spending is also targeted to rise to five percent of economic output every year from 3.3 percent last year. Duterte also vowed to continue PPP under which 12 projects were awarded since 2010.

“While the private sector will also be affected by more expensive interest, it can be negated by efficiencies in doing construction, operation and maintenance,” Canilao said.

“They need to pursue and prioritize projects and implement those in a very timely manner,” she said in a separate e-mail.

Mapa said the central bank could also be a source of confidence for the economy with its interest rate corridor mechanism.

“This would help the BSP manage financial flows and afford them scope to leave rates untouched a little longer,” he said.

Politically, some of Duterte’s plans including his thrust toward federalism and reinstituting death penalty could also thwart investor confidence and push up rates if he is not careful.

“Duterte must be able to navigate without causing serious disruptions and thus, not threaten confidence in the country’s economy,” he said.

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