Philippines less vulnerable to US rate hikes – Fitch

MANILA, Philippines — The Philippines, together with its banking and corporate sectors, is less vulnerable to the ongoing normalization path being taken by the US Federal Reserve,  according to Fitch Ratings.

In a report, Fitch said the Philippines has a strong foreign exchange coverage and is a net external creditor position.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the country’s gross international reserve (GIR) level stood close to $80 billion and is enough to cover 7.9 months worth of imports of goods and services.

Fitch said the country’s current account (CA) balance incurred a small deficit due to rising imports, but is well covered by strong foreign direct investment (FDI) inflows and sustained remittances from overseas Filipinos.

Furthermore, it added the country’s monetary and foreign exchange policy has low vulnerability to the decision of the US Fed to raise rates over the past few years.

The US Fed has raised benchmark rates once this year but is looking at two more rate hikes to match last year’s three rate increases.

Fitch said the BSP has allowed a higher degree of exchange rate flexibility in response to the current account shift to a deficit on the back or rising imports of capital equipment and raw materials to support the country’s growing economy.

It added the BSP’s inflation targeting framework adopted in 2002 is credible.

The BSP’s Monetary Board raised interest rates by 25 basis points last May 10 to arrest potential second-round effects by tempering the buildup of inflation expectations.

Inflation leapt to a fresh-five year high of 4.5 percent in April from 4.3 percent in March amid rising oil prices and the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

This brought the average inflation to 4.1 percent in the first four months, exceeding the BSP’s two to four percent target.

The credit rating agency pointed out the debt dynamics of the Philippines also remain favorable with low participation of non-residents in the domestic debt market.

However, it noted the high foreign currency debt as well as higher pass-through of higher interest rates could raise debt servicing costs.