BSP’s Inflation Target of 2-4% Not Achieved in 2018

Philippines’ exports unexpectedly declined in November to -0.3% yoy after reaching a ten-month high of 5.5% in October. The decline in exports was dragged by weak exports of mineral and forest products, by -34.4% yoy and -13.3%, respectively in November, while exports of manufactures slowed sharply to 1% yoy (7.3% in October). In particular, exports of electronic goods declined in November by 1.6% yoy (0.8% in October), its first negative growth since February 2018. Meanwhile, imports had moderated in November to 6.8% yoy (21.4% in October), after seven concecutive months of double-digit growth. Slower import growth was due to capital goods and raw materials & intermediate goods, which slowed to 4.9% and 6.7% yoy, respectively. As a result, the trade deficit narrowed from its record high of US$4.1bn in October to US$3.9bn in November. Moving forward, the country’s trade balance may remain in deficit amid the ongoing “Build, Build, Build” program, to accelerate infrastructure spending, which has contributed to the rise in imports of construction materials. This in turn may continue to weigh on the Peso which has depreciated against the US$ by 5.1% in 2018.

Inflation in the Philippines improved for the second consecutive month in December to 7-month low of 5.1% yoy from 6% yoy in November. In 2018, inflation averaged 5.2% yoy (2.9% in 2017), failing to meet within Bangko Sentral Ng Pilipinas (BSP) target range of 2-4% in 2018. Slower inflation in December was mainly due to food and non-alocoholic beverages, which had eased to 6.7% yoy from 8% in November. Transport cost had also slowed to 4% yoy from 8.9% in November, due to the drop in global crude oil prices and the downward adjustment in the country’s public utility jeepney minimum fare to P9 from P10 in certain areas. BSP guided that December’s inflation reaffirms their view that price pressures have begun to dissipate. This follows BSP’s total of five interest rate hikes in 2018 to 4.75%. It stated that risks to the inflation outlook have become more evenly balanced due to the uncertain global economic environment. Therefore, it expects headline inflation to within its 2-4% target range in both 2019 and 2020.

Separately, in the World Bank’s (WB) latest report, it highlighted growth in the East Asia and Pacific will moderate in 2019 from 6.3% yoy to 6% in 2019 amid stable commodity prices, easing global demand and trade as well as gradual tightening of global financing conditions. WB noted that region remains as one of the fastest growing due to positive current account balances net of FDI in countries like Malaysia, Thailand and Philippines. However, WB highlighted that vulnerabilities remain in areas like public and private debt, external debt (e.g. in Malaysia), foreign participation in local-curency sovereign bond markets (e.g. in Indonesia and Malaysia), fiscal deficits and CA deficits (e.g. Indonesia). In addition, downside risks to the region’s outlook have intensified due to trade tensions. It further emphasised that as the expansion of the region is largely dependent on exports as well as returns on foreign assets and direct investment, this makes the region vulnerable to external shocks.

Source: Affin Hwang Research - 11 Jan 2019