Bloomberg News

Philippines Holds Rates as Capital Outflows Buffet Stocks (1)

June 13, 2013

The Philippines held its benchmark interest rate and refrained from adding to cuts on its special deposit accounts as Southeast Asia battles capital outflows that have pummeled stocks and currencies.

Bangko Sentral ng Pilipinas kept the rate it pays lenders for overnight deposits at a record-low 3.5 percent, according to a statement in Manila today, as forecast by all 20 economists surveyed by Bloomberg News. It also held the rate on all SDAs at 2 percent, as predicted by seven of 16 economists, with the rest forecasting a cut.

“The risk of further SDA rate cuts has declined because of recent market movements,” said Eugenia Fabon Victorino, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “With 12-month average inflation (PHC2II) at 3.1 percent and 7.8 percent economic growth, the central bank has enough room to keep the key rate steady until end-2014.”

Capital outflows from Southeast Asia have increased after Federal Reserve Chairman Ben S. Bernanke said last month policy makers could consider reducing stimulus. The Philippines joined South Korea and New Zealand today in keeping monetary policy unchanged, while Indonesia unexpectedly raised borrowing costs.

The Philippine benchmark index fell 6.8 percent at the close before the decision today, the most since Oct. 2008. The peso gained 0.3 percent to 43.10 per dollar after slumping to a one-year low earlier this week. Overseas investors have pulled a record $2.7 billion from Thai, Indonesian and Philippine stock markets so far this month, the biggest eight-day outflow since Bloomberg began compiling the data in March 1999.

Bubble Risks

The Philippines’ first investment-grade rankings from Fitch Ratings and Standard & Poor’s earlier this year had lured inflows, boosting the peso and prompting policy makers to implement measures to avert asset-bubble risks. The central bank cut the rate on SDAs thrice this year, banned access for mutual funds and individually managed accounts, and relaxed curbs on dollar purchases.

Philippine SDAs held 1.88 trillion pesos ($44 billion) as of May 24, more than six times the 286 billion pesos in the overnight facility. The accounts, which have tenors of one week, two weeks and one month, offer higher rates than three-month Treasury bills that the government sold at 0.9 percent last week.

Bangko Sentral is considering further curbs on property loans to prevent a housing bubble, Governor Amando Tetangco has said. Inflation held at a 13-month low of 2.6 percent in May.

“Keeping policy settings steady allows time to assess the impact of recent fine-tuning in monetary operations,” the central bank said in a statement today. “Recent global financial market developments also support an unchanged policy stance,” it said, adding that the inflation environment remains benign and domestic growth is firm.

Many Options

President Benigno Aquino is increasing spending to a record this year while seeking more than $17 billion of investments in highways and ports. Ayala Land Inc., DMCI Holdings Inc., and Megaworld Corp. are among companies building homes and offices.

The World Bank yesterday cut its global growth forecast for this year and said the recovery “remains hesitant and uneven.” Philippine expansion last quarter was the fastest in Asia, with gross domestic product rising 7.8 percent from a year earlier.

The central bank forecasts inflation to average 3.1 percent this year and 3.6 percent next year, Deputy Governor Diwa Guinigundo said today. Its previous estimates were 3.2 percent in 2013 and 3.4 percent in 2014.

Bangko Sentral’s exchange-rate regime is flexible and it has “many options” to address outflows, Guinigundo said, citing tools including the policy rate and reserve requirements. “As inflation remains manageable, we will rely on prudential measures,” he said, adding that the peso’s recent weakness is not because of domestic factors and the stock-market drop is a healthy correction.

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Max Estayo in Manila at mestayo@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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