By Lee C. Chipongian
The Philippines’ sustained growth over the medium term has yet to show evidence of overheating even with rising inflation and weakened external accounts, according to credit rating agency Moody’s Investors Service.
“We believe that overheating risks in the Philippines are not yet material,” said Moody’s in its in-depth report on the country’s overheating risks. Philippines with a “Baa2” stable rating, is one of the fastest growing GDP in the Asia Pacific region last year, and second fastest among Moody’s rated “Baa” sovereigns globally.
While noting the nearly four percent level of inflation rate in February, the 12-year low peso-US dollar exchange rate, and a 150 bps second market government yields, the credit watcher said there is still no sign of overheating risks based on the transitory factors affecting inflation increases, and the growth-inducing infrastructure investment amid “favorable demographics” and external position that will “remain roughly balanced.”
There are risks to inflation in the near term, it said, such as uptick in the prices of food and non-alcohologic beverages due to higher excise taxes. The same tax adjustments will also impact on other consumables.
The rising global oil prices will likewise continue to be one of the transitory factors that will pull up inflation.
“However, we do not see a significant and prolonged rise in inflation beyond the central bank’s current estimates as we expect the impact from tax measures to be transitory and only muted pressures from real wage growth and commodity prices, given our current outlook, especially for oil,” said Moody’s, adding that the underlying pattern of inflation “does not portend overheating as price pressures have not been generalized across all goods.” The BSP forecasts average inflation this year of 3.7 percent using the 2012 base year.
On capacity constraints, Moody’s said demand for economic activity will take care of capacity and an “increasing working-age population, rising productivity and better infrastructure will lift long-term potential output and mitigate overheating risks.”