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MANILA – The Bangko Sentral ng Pilipinas may hike its key interest rates by yearend as the domestic economy expands with the help of public and private investments and strong household consumption, Moody's Analytics said on Thursday.
In its latest research note, the economic analysis unit of Moody's said it expects rate hikes from the Philippine central bank by the end of the year as “robust domestic activity starts to push the economy beyond capacity.”
The country is benefiting from the Aquino administration’s strategy of boosting government spending, accompanied by strong private sector investment in the services industry. Moody’s Analytics said the strong growth of the business process outsourcing industry has offset the weakness in electronics exports, which make up half of the country’s total shipments abroad.
Risks to inflation are evenly balanced given the easing prices of commodities in Asia alongside stronger government, household and investment spending. This will give central banks in the region enough room to loosen monetary policy to make up for the weakness in other sectors.
Members of the Association of Southeast Asian Nations-5—Philippines, Indonesia, Malaysia, Singapore and Thailand—will weather the global economic turmoil as domestic demand from these countries would keep them afloat, Moody's Analytics said. Because of this, the region remains a “bright spot” in a generally gloomy world economy as strong investments and household spending would compensate for the lackluster performance of its exports, traditionally its growth driver.
Indonesia and Malaysia are enjoying support from investments and household spending, keeping domestic demand up. Foreign direct investments have surged in Indonesia by 30 percent in the first quarter while Malaysia’s private investments have been “solid” because of the mining and hard commodity-based chemical manufacturing, alongside public spending.
Singapore, however, did not fare well relative to its four neighbors since its performance is tied to the global economy. Its first-quarter numbers were lifted by the pick-up in residential construction and manufacturing after the supply chain recovered from the Thai floods. Moody’s Analytics expects the Singaporean economy to slow down through the second and third quarters this year.
That said, Thailand rebounded from the flood-driven contraction in the fourth quarter of last year as it enjoyed a sharp recovery in the first three months of 2012. The country has been supported by consumption and investments, which have rebounded strongly. Manufacturing is a mixed bag given that it is the production base for many car companies that are enjoying strong demand from the US and Japanese markets. Electronics, however, is weak as global tech demand is still soft.
“But risks are tilted firmly to the downside. The big worry is the toll that Europe’s crisis will have on U.S. and Asian demand. A severe downturn in Europe would weaken exports further and stifle foreign investment, while tighter financial conditions would crimp the availability of credit, further derailing investment and household spending,” Moody’s Analytics said.
The research firm said investments in the region would continue to their steady climb, expanding potential output and long-term growth prospects.
In the case of the Philippines, it has created a “favorable environment” that encourages foreign investment in its BPO industry through tax perks and subsidized leasing. The country, like Malaysia, is also pursuing public-private partnerships to spread risks and returns with the private sector and lifting overall investments.
“This optimism about local corporates and indeed about the broader economic outlook is reflected in the strong performance of local stock markets. Asean markets have consistently outperformed the Asian average and easily outshone their western peers since the 2009 global recession,” Moody’s Analytics said.
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