BSP denies Philippines' economy is overhaeting

By Lee C. Chipongian

AMRO chief economist Dr. Hoe Ee Khor said it is time for the Philippine central bank to consider adjusting monetary policy stance to avoid an overheating economy.

AMRO is the ASEAN+3 Macroeconomic Research Office. “There are signs of overheating for the Philippine economy and at the same, I am saying that these are just emerging signs, it doesn’t mean that the economy will get worse,” said Khor. “The whole idea is to try to cool down the economy. The central bank should take that into consideration (moving rates) and the governor (of the central bank) is fully aware of this that there is a need.”

Khor presented AMRO’s second annual regional surveillance report on the ASEAN+3 Regional Economic Outlook (AREO) which assesses regional economic outlook and financial stability, and the discussion is part of the 51st Asian Development Bank briefings.

In the 2018 AREO report, it placed the country’s business and credit cycles in the “late” stage, along with Japan. The business cycles are in the “early,” “mid,” “late,” and “downturn.” According to Khor, most economies in the region are at mid-business cycles where output gap is small and there is stable inflation. In the credit cycle, credit growth in most economies is “slowing after the peak” or an above-trend growth, stimulated by policy actions.

The Philippines is among those economies with a slowing business and credit cycle, with Myanmar, Cambodia, China, Korea, Lao PDR, Malaysia and Singapore, however except for the Philippines, the rest on the list are in the “mid” cycle.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo, while appreciating the analysis behind the AMRO metrics for business and credit cycles, disagreed with the Philippines’ spot and belied symptoms of an overheating. Economies in the “late” listing indicates overheating concerns. Those in the “mid” cycles, in the meantime, would not require further policy stimulus to support growth such as most ASEAN countries plus Hong Kong.

“Supposed to be, when you are in the ‘late’ business cycle and you are slowing credit cycle, people would readily equate that with some overheating. That may not be true in the case of the Philippines,” Guinigundo said later after presentation. He was commentator to the AREO report.

Guinigundo said there is a higher demand for liquidity and even as credit continues to grow, and output growth “while maybe higher than average” – these numbers are still consistent with the potential output which the BSP assess is between 6.5 percent to seven percent. “It depends what kind of potential output AMRO has computed. In our case… it is still consistent with our computed potential output.”

“For us, we are not into an overheating mode,” he stressed. He cited the methodologies used by the Bank for International Settlements and the International Monetary Fund to further monitor evidence of overheating.

Khor emphasized the need for policymakers in the region to build policy space, especially in monetary policy, in view of a global tightening of financial conditions. “It’s time for authorities (BSP) to take measures to ensure (economy) does not get overheated. Doing a bit of tightening would make sure inflation will come back down.”