Rate easing cycle to support economic growth — Moody’s

MANILA, Philippines — Moody’s Investors Service said the easing cycle by the Bangko Sentral ng Pilipinas (BSP) amid the continued downtrend in inflation would support economic growth for the remainder of the year.

In its latest credit opinion on the Philippines, the debt watcher said the benign inflationary environment has allowed the BSP’s Monetary Board to slash the overnight reverse repurchase rate three times since May, delivering a cumulative 75 basis point cuts.

 “We expect that the policy rate cuts – as well as further reductions in the reserve ratio requirement through the remainder of the year – will ease monetary conditions and support growth through the remainder of 2019,” Moody’s said.

Inflation eased to a 41-month low of 0.9 percent in September from 1.7 percent in August, bringing the average inflation to 2.8 percent in the first nine months of the year.

This was the lowest inflation since hitting 0.7 percent in April 2017. Inflation peaked at 6.7 percent in September and October last year.

The consumer price index (CPI) accelerated to 5.2 percent last year from 2.9 percent in 2017 due to elevated oil and food prices as well as weak peso paving the way for a tightening cycle that saw interest rates rise by 175 basis points between May and November.

“The effects of BSP’s monetary tightening over the course of 2018, the fading of base effects from higher excise taxes on various food and beverage items that were implemented at the beginning of 2018, and weaker rice-price inflation following the implementation of rice tariffication all contributed to the decline in overall inflation. Mirroring this trend, core inflation – which excludes food & energy – has been maintained at around three percent since earlier in the year, down from the peak of 4.6 percent reached last October,” the debt watcher said.

The BSP has also lowered the level of deposits banks are required to keep with the central bank by 300 basis points for big and mid-sized banks and by 200 basis points for small banks freeing up more than P500 billion in additional liquidity into the financial system to boost economic activity.

This brought to 500 basis points the reduction of the RRR level since last year as former BSP governor Nestor Espenilla Jr. committed to bring down the ultrahigh RRR to single digit by 2023.

Moody’s said the country’s gross domestic product (GDP) easing further to 5.8 percent this year after slowing down to 6.2 percent last year from 6.7 percent in 2017 doe to lower government spending caused by the delayed passage of the 2019 national budget.

The GDP growth eased to 5.5 percent in the first half of the year from 6.3 percent in the same period last year. It also slowed down to a four-year low of 5.5 percent in the second quarter from 5.6 percent in the first quarter.

The debt watcher said public spending would rebound in the second half of 2019 given government’s efforts to speed up the execution of the delayed 2019 national budget.

 “We expect these trends to continue into 2020, with the government’s ‘catch-up’ spending spilling over into next year. In addition, the proposed 2020 budget calls for a further 12 percent increase in national government expenditure, mostly in the areas of infrastructure, social services, and income transfers to poorer households,” it said.

As such, Moody’s said the country’s GDP growth would pick up slightly to 6.2 percent next year.