Philippines

Another hike in 4Q2018 depends on Aug inflation

Healthy economy, surging inflation and pressure on the peso allowed the central bank to stage for a 50 basis point (bps) increase in the benchmark rate to 4% after raising rates by 25bps at each of its May and June meetings, the biggest since July 2008. The central bank now follows a similar move by the central banks in emerging markets like Indonesia and India which took aggressive steps to curb the fallout from rising US rates and a stronger USD. Besides, the Philippines is the only Southeast Asian economy with negative real interest rates at -2.2%.

The aggressive rate hike and continued hawkish stance by reiterating its “commitment to take decisive action” should support the peso. Another rate hike in 4Q2018 remains high on the cards. Much will depend on the potential inflation outlook. Should inflation peak in August and starts to ease, it could then provide some easing pressure for the central bank to take a pause on its rate hike for the rest of the year. Meanwhile, the 2Q2028 GDP grew 6.0% y/y from 6.6% in 1Q2018 supported by domestic demand while exports turned weak. We have lowered our 2018 GDP outlook to 6.2% from previously 6.6% with growth coming from domestic demand. i.e. the private sector and the government’s aggressive infrastructure catch-up programme to remain strong.

Meanwhile, private consumption is expected to be moderate due to high inflation, weak agriculture production, slower manufacturing and rising interest rate, which is poised to offset the higher takehome income from income tax reform.

• A healthy economy, surging inflation and pressure on the currency allowed the central bank to stage for a 50 basis-point (bps) increase in the benchmark rate to 4%. Bangko Sentral ng Pilipinas raised its benchmark rate by 25bps at each of its May and June meetings. The 50bps hike is the biggest since July 2008 when it raised rates by 50bps.

• The central bank now follows a similar move by the central banks in emerging markets such as Indonesia and India which took more aggressive steps to curb the fallout from rising US rates and a stronger USD. Besides, the Philippines is the only Southeast Asian economy to have negative real interest rates at -2.2%. Inflation is set to breach the central bank’s 2%– 4% target band in 2018, with the peso’s more than 5% slump against the USD this year adding to concerns

• We believe the aggressive rate hike and continued hawkish stance by reiterating its “commitment to take decisive action” should support the peso. Room for the central bank to institute another rate hike later in 4Q2018 remains high. Much will depend on the potential inflation outlook. Should inflation peak in August and starts to ease, it could then provide some easing pressure for the central bank to take a pause on its rate hike for the rest of the year.

• Meanwhile, the 2Q2028 GDP grew 6.0% y/y from 6.6% in 1Q2018. Growth was supported by domestic demand which remained strong driven by business, household and government spending. The drag was from weaker exports. We have lowered our 2018 GDP outlook to 6.2% from previously 6.6%. With imports remaining strong, we expect domestic demand coming from private sector and the government’s aggressive infrastructure catch-up programme to remain strong. But private consumption will be moderate due to high inflation, weak agriculture production, slower manufacturing and rising interest rate which is poised to offset the higher take-home income from income tax reform.

China

Priority in shoring up GDP while watching inflation closely

Factory price inflation cooled in July amid a wider slowdown in economic growth as China remains locked in a heated trade dispute with the US. However, consumer inflation picked up in July largely due to a rise in non-food prices. The July inflation data is the first official reading on the impact on prices from China's retaliatory tariffs on US$34 billion of US goods that went into effect on July 6 and applied to a range of products from soybeans, to mixed nuts and whiskey.

While the tit-for-tat tariffs between China and the US have fuelled worries about the inflation outlook, we believe the impact on consumer prices will be limited. Hence, inflation is unlikely to become much of a concern for policymakers. At this point of time, we and the policymakers will be watching price pressures closely, we believe the central bank is likely to give priority to policies that help shore up the slowing economy.

• The producer price index (PPI) — a gauge of factory gate inflation — rose 4.6% y/y in July from 4.7% y/y in June. It showed July’s import growth accelerating to its fastest since January, although the outlook for inbound shipments is clouded by the yuan's sharp drop in recent months. Raw material prices jumped 9.0% y/y in July from 8.8% y/y in June.

• The Trump administration tightened pressure for trade concessions from Beijing by proposing a higher 25% tariff on US$200bil worth of Chinese imports. China in turn retaliated by proposing tariffs on US$60bil worth of US goods, ranging from liquefied natural gas (LNG), iron ore and steel to aircraft.

• We expect the proposed tariffs by China and the yuan's recent decline could push up import prices, which could in turn drive producer price inflation.

• While the tit-for-tat tariffs between China and the US have fuelled worries about the inflation outlook, we believe the impact on consumer prices will be limited. Hence, inflation is unlikely to become much of a concern for policymakers.

• The Consumer Price Index (CPI) rose 2.1% y/y which was unchanged from June's growth, but still within the government's comfort zone of 3%. The core CPI, which strips out volatile food and energy prices, climbed 1.9% y/y in July, unchanged from June's pace.

• The food price index edged up 0.5% y/y after ticking up 0.3%y/y in June. Non-food prices rose 2.4%y/y compared with 2.2% y/y in June. We expect headline inflation is expected to rise gradually to around 2.5%, while producer price inflation would moderate.

Source: AmInvest Research - 10 Aug 2018