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Further rate hikes by the Bangko Sentral ng Pilipinas (BSP) may have limited impact on inflation and would likely slow economic growth, analysts said.

Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said another rate hike at this point will not likely impact inflation in a “substantial” way.

“What rate hikes will be effective in carrying out would be a broad-based slowdown in growth momentum,” he said in a note.

BSP Governor Eli M. Remolona, Jr. on Wednesday said he is not ruling out a 25-basis-point (bp) increase at the Monetary Board’s next policy review on Nov. 16.

The BSP has kept the key interest rate at a near 16-year high of 6.25% at its last four meetings. Another 25-bp rate hike will bring the benchmark rate to 6.5%.

Last week, National Economic and Development Authority Secretary Arsenio M. Balisacan warned that further monetary tightening could hurt the economy and consumers who are already struggling from high inflation.

Mr. Mapa noted higher borrowing costs would affect bank lending, which is linked to capital formation and gross domestic product (GDP) expansion.

“We believe the net result of additional tightening would be much slower growth, with only a modest impact on inflation but only after growth slides to multi-year lows,” he said.

ING Bank lowered its Philippine growth forecast to 4.7% (from 4.8% previously) for this year and to 4.5% (from 4.7%) for 2024. Both estimates are below the government’s 6-7% and 6.5-8% target for 2023 and 2024, respectively.

In an e-mail, University of Asia and the Pacific Senior Economist Cid L. Terosa said rate hikes will be effective in quelling inflation only if inflation is demand-driven, noting that the current inflation is driven by supply constraints and geopolitical tensions.

“In the Philippines, businesses and investments are more sensitive to interest rate hikes than consumers. Hence, the net effect of rate hikes on economic growth in the Philippines tends to be negative. It appears that the negative impact of interest rate hikes and inflation rate on economic growth in the Philippines can extend over the long term,” Mr. Terosa said.

Headline inflation accelerated for a second straight month to 6.1% in September from 5.3% in August as food and transport costs surged. September marked the 18^th straight month that inflation exceeded the central bank’s 2-4% target. Year to date, inflation averaged 6.6%.

Further tightening
ING’s Mr. Mapa said the BSP will likely resume monetary tightening only to secure the inflation path in 2024, as market players are not pricing in a rate hike by the US Federal Reserve and the peso remains steady against the dollar.

“With 2023 winding down, any rate hike today would only have an impact on the 2024 inflation outlook.  We believe Mr. Remolona will pull the trigger on a rate hike in the near term, possibly after the October inflation report, a potential Fed rate hike or at the November BSP policy meeting,” he said.

Any rate hike would demonstrate the BSP’s commitment to fight inflation, anchor inflation expectations and tame second-round effects by “snuffing out” pressures from the demand side, Mr. Mapa said.

Mr. Terosa said the continued rise in prices may still prompt the Philippine central bank to hike rates, Mr. Terosa said.

“Aside from rate hikes, the government should explore solutions that will ensure stability in the production and supply of key commodities,” he added.

Meanwhile, DBS Bank Senior Economist Radhika Rao said rising prices of food and fuel can “unhinge” inflationary expectations.

“Our base case is for a pause till yearend but the odds of an inter-meeting hike or at the scheduled review has increased after the September inflation release as well as pipeline risks of further adverse weather pushing by food inflation,” she said.

“The FOMC (Federal Open Market Committee) review in early-November might also sway the timing and likelihood of further tightening by the BSP,” she added.

The US Federal Reserve opted to keep the target Fed funds rate unchanged at 5.25-5.5% at its meeting last month. The FOMC is scheduled to meet from Oct. 31 to Nov. 1 to discuss policy. — Keisha B. Ta-asan, Reporter

The Philippine economy is seen to be “less affected” by the economic slowdown in China, Finance Secretary Benjamin E. Diokno said.

“The Philippines is expected to be less affected by China’s slower economic growth given that the potential slowdown in exports could be partially mitigated by the demand from our large domestic market,” he said during the ASEAN Roundtable at the World Bank-International Monetary Fund (IMF) Annual Meetings in Marrakech, Morocco on Oct. 11.

However, Mr. Diokno noted that a slowing China economy could “dampen global trade and put downward pressure on the Philippines’ goods and service exports.”

In August, total exports jumped by 4.2% year on year to USD 6.7 billion. The United States was the main destination of Philippine exports during the month, with export value reaching USD 1.1 billion, followed by Japan with USD 918 million. Exports to Hong Kong and China stood at USD 871 million and USD 838 million, respectively.

“Sharp swings in market sentiment and risk premia could trigger a sudden tightening of financial conditions, capital outflows, and depreciation of the peso. Intensification of geopolitical tensions and fragmentation could disrupt supply chains and investment,” he added.

Mr. Diokno said the Association of Southeast Asian Nations (ASEAN)+3 region will face both indirect and direct risks from China’s property crisis.

“We note that financial systems in the ASEAN+3 region could be exposed to risks arising from China’s property sector through three main channels: directly, through any lending to the sector; indirectly, from their exposures to other financial systems that are involved with that sector; and indirectly, from lending to their own domestic economy that may be hard hit by developments in China,” he said.

The IMF projected China to grow 5% in 2023 but slow to 4.2% in 2024, slower than previously estimated due to the property crisis and weak external demand.

‘Fastest-growing economy’
While the Philippines is projected to be the fastest-growing economy in the ASEAN region this year, the outlook is still clouded by external headwinds.

“Growth in the Philippines has proven remarkably resilient over the past couple of years. After a strong rebound in 2022, the economy continues to perform well, even if it is losing momentum,” Fred Neumann, HSBC chief Asia economist and co-head of Global Research Asia, said in an e-mail.

“At the same time, the relative outperformance of the Philippine economy needs to be kept in perspective: relative to its potential, growth is currently falling short. That’s because of cyclical headwinds like higher interest rates, both locally and globally,” he added.

Multilateral lenders and institutions like the International Monetary Fund, the World Bank, the Asian Development Bank, and AMRO have downgraded their 2023 growth forecasts for the Philippines. Their estimates are below the Philippine government’s 6-7% GDP growth target but are projected to outperform economies in Southeast Asia and the Asia-Pacific regions.

“One reason why the Philippines is outperforming many peers in the region is that it is less exposed to the global manufacturing cycle: unlike other economies, which are more dependent on manufacturing exports,” Mr. Neumann said.

The Philippine economy is driven mainly by consumption. Household spending accounts for three-fourths of the economic growth.

HSBC expects Philippine GDP to average 4.8% this year and 5.2% in 2024.

“There is considerable uncertainty around these forecasts, of course, as we have little visibility yet on what third-quarter performance was. We forecast growth of 4.7% year on year for the third quarter,” Mr. Neumann said.

Pantheon Chief Emerging Asia Economist Miguel Chanco said their outlook for Philippine growth is still on the “high side” but not among the strongest in the region.

“We expect 4.5% in 2023 and 4% in 2024, which puts the Philippines more in the middle of the pack, rather than one of ASEAN’s clear regional outperformers, which was the case pre-COVID-19, alongside the likes of Vietnam,” he said in an e-mail.

“Certainly, the economy’s structural growth prospects remain solid, but there’s no denying that it’s in the middle now of a cyclical growth slowdown, which will have a bearing on its regional position.”

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the Philippines is unlikely to post the fastest growth in the region.

“It would be good (if) the Philippines was the fastest-growing economy, however, given significant headwinds, both domestic and international will likely mean we see growth slipping to 4.8% for the year,” he said in an e-mail.

Pantheon’s Mr. Chanco also noted that the government’s 6-7% goal was “never in reach.”

“Our current forecast for third-quarter GDP growth is south of 2% year on year, which implies a technical recession in quarter-on-quarter terms. Private consumption, the economy’s main driver, is clearly wobbling, as it has fewer legs to stand on this year, versus last,” he said.

ING Bank’s Mr. Mapa said that growth may not even reach the lower end of the target for this year and 2024.

“The combination of moderating consumption due to fast-fading revenge spending and elevated borrowing costs will likely force growth to slow. We have yet to feel the brunt of Bangko Sentral ng Pilipinas (BSP) policy increases yet and we have already seen the negative impact on growth momentum,” he added.

The BSP has kept its benchmark interest rate at a near 16-year high of 6.25% since March to tame inflation.

HSBC’s Mr. Neumann noted that elevated inflation and high interest rates would weigh on household spending this year and in 2024, “though even then the Philippines will likely remain an outperformer in the region.”

To support growth, Mr. Neumann said that the country must focus on boosting foreign investments to “expand the manufacturing sector’s connectivity with regional supply chains.”

“If the Philippines can attract a greater share of regional supply chain manufacturing, boosting goods exports, growth would accelerate sustainably,” he added.

The Philippine Statistics Authority is scheduled to release third-quarter GDP data on Nov. 9. — Luisa Maria Jacinta C. Jocson, Reporter

The Philippine Economic Zone Authority (PEZA) signed a partnership agreement with Japan International Cooperation Agency (JICA) and Japanese-led Advantec Philippines, Inc. for future renewable energy projects.

“The tie-up is part of JICA’s Public-Private Partnership (PPP) promotion program that utilizes Japanese innovations in implementing development cooperation projects,” JICA said in a press release.

Under the partnership, Advantec will introduce its solar power technology in the Pampanga Economic Zone with an annual energy yield of 3.6 million kilowatts.

The project is also seen to potentially reduce approximately 1,200 tons of carbon dioxide annually.

“JICA has been actively undertaking its PPP promotion program that encourages more business deployment of Japanese companies in the Philippines,” JICA Chief Representative Takema Sakamoto said in a statement.

“These Japanese companies introduce unique and advanced technologies and business models that are geared towards sustainable development. JICA keeps on supporting Filipino friends in line with the co-benefit approach,” Mr. Sakamoto said.

For the initial stage of the cooperation, Advantec will conduct a feasibility study to determine the viability of the solar power technology operation in the economic zone and how it fits into Philippine laws and regulations.

The study also aims to identify what PEZA rooftops or land areas will be used for the pilot project sites.

“Such partnership is powerful to also give potential renewable energy investors ideas on the best pathways to participate in the Philippine renewable energy landscape,” JICA said.

PEZA Director General Tereso O. Panga said that the memorandum of understanding signed on Thursday is in support of President Ferdinand R. Marcos, Jr.’s directive to promote clean and green production, energy efficiency, and the use of renewable energy sources.

In his second State of the Nation Address, Mr. Marcos announced that the Philippines is aiming to achieve a 35% renewable energy share in the power mix by 2030 and 50% by 2040.

Mr. Panga said that Advantec’s primary objective “is to establish and execute numerous solar power facilities initially within the Pampanga Economic Zone, with the aim of supplying generated electricity to PEZA and its locators operating within the zones.”

He added that PEZA will assist Advantec, particularly in securing the documentary requirements with the government, identifying suitable land areas, and facilitating the registration of solar photovoltaics.

“All these efforts shall be in accordance with the provision of the Corporate Recovery and Tax Incentives for Enterprises Law and the Renewable Energy Act of 2008,” Mr. Panga said. — Justine Irish D. Tabile

The Philippines financial sector is “highly vulnerable” to climate risks, the World Bank said.

“Financial institutions operating in the Philippines face high operational risks from natural disasters,” the World Bank said in a background paper for its Country Climate and Development Report.

“The Bangko Sentral ng Pilipinas (BSP) reports that in the aftermath of storms and natural disasters, banks are faced with severe disruptions of operations resulting from damage to infrastructure and branches,” it added.

Natural disasters also affect the “soundness of financial institutions and stability of the overall financial system,” the World Bank said.

Citing data from AIR Worldwide, the World Bank said typhoons alone cause losses in public and private assets equivalent to 0.71% of gross domestic product annually.

“Typhoons could increase market risks in the Philippines’ financial sector, where banks hold sizeable investment portfolios, totaling 20% of total assets as of end-December 2018,” it added.

The occurrence and size of a typhoon “significantly” impacted nonperforming loan (NPL) ratios in the Philippines, it added.

World Bank data showed that for a 1% rise in the typhoon damage ratio, the NPL ratio would rise by 0.66% in the same year on average.

“During interviews with BSP and banks, it was reported that rural and agricultural exposure, and therewith rural and cooperative banks, are most significantly affected by the impacts of typhoons. In contrast to universal banks, these banks predominantly operate in the regions and hold sizeable exposures in loans for the agricultural sector (17.5%).”

The insurance sector also faces “increasing underwriting risks” due to climate issues, the World Bank added.

“Large scale disasters can affect an insurer’s ability to pay out claims. During interviews, industry stakeholders reported difficulties following large typhoons,” it said.

“The aftermath of Yolanda showed that the sector was significantly affected by claims as a result of typhoon damages, even though catastrophe insurance penetration is low. Yolanda also affected the micro insurance sector, which paid out over P500 million in claims,” it added.

The financial sector is vulnerable to both physical risks and transition risks due to climate change, the World Bank said.

“Physical risks are already highly material for the Philippine financial sector. Typhoons, floods, droughts, as well as geological events like earthquakes and volcanic eruptions, can affect — and in fact are already affecting — credit, market, operational and underwriter risks, therewith threatening the profitability and solvency of banks and insurers,” the World Bank said.

To mitigate these risks, the government should strengthen post-disaster mechanisms and scaling up financial risk management of public assets., it said.

The government should also prepare for the increasing cost of climate disasters, it added. — LMJCJ