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Interest rates likely to rise next year, analysts say

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MANILA - The shift to higher interest rates is inevitable, likely keeping stocks volatile next year as the Federal Reserve finally pulls the plug on its monetary stimulus amid signs of a strengthening US economy.

During a recent economic briefing organized by the Financial Executives of the Philippines, BDO Unibank chief market strategist Jonathan Ravelas said there's no stopping the US central bank from raising interest rates, not even the partial shutdown of the federal government because of the budget impasse.

"The shutdown will affect more of their operations rather than the economy. The economy continues to grow. But the longer the delay that they get their acts together, the more uncertain it becomes," Ravelas said.

Ravelas described 2014 as a "very volatile" year for equities with investors adjusting to the possible shift to higher interest rates. Wild price swings will drag the Philippine Stock Exchange index (PSEi) back to the 5,500-5,800 levels or push it to the 7,400-7,800 range next year.

For 2013, Ravelas sees the bellwether index ending at 6,500 with the US shutdown, the change in Fed leadership and the guessing game on the timing of its tapering contributing to the volatility.

"I believe the taper will happen and it will be a quick one because I believe US interest rates will rise and I believe the dollar will appreciate further," he said.

Last month, the Fed postponed scaling back its $85-billion monthly bond-buying program as it awaits more evidence of improvement of the US economy.

"Today, for equity markets, it seems there is a shift from a high tide of money moving into Asia, we're starting to move into a low tide. We're starting to see the beginning of the change. Why? Because the US economy is improving so there will be a lot of adjustments," Ravelas said.

Ravelas forecasts an increase of 50 basis points in the overnight rates of the Bangko Sentral ng Pilipinas (BSP) next year with the first hike likely happening early or in the middle of the first half.

The BSP has kept its policy rates at record lows of 3.5 percent and 5.5 percent for the overnight borrowing and lending windows since the start of the year.

With interest rates at historically low levels, there's no way to go but up, said Maybank ATR Kim Eng Capital Partners Inc vice president and regional economist Luz Lorenzo.

But any increase will be minimal because of massive liquidity in the financial system, she said.

"The Philippines was the only country where growth was upgraded for this year and the next while other countries were downgraded. Because of that, the country deserves a higher multiple because of the better gross prospects here. It's very difficult to have a multiple so much higher than average of 14 times. We're now at 18 times. Eighteen to 19 times is something that can be justified by growth prospects," Lorenzo said.

Compared to its peers in the region, the Philippines is trading at a higher multiple with investors paying a premium to participate in the country's growth story.

The Philippine economy grew 7.6 percent in the first half of the year to remain as one of Asia's fastest-growing nations.

Last week, Moody's Investor Service finally awarded the Philippines its long overdue investment grade rating, joining Fitch Ratings and Standard & Poor's in raising the country's sovereign debt above junk status.

Asian Development Bank also joined other multilateral lenders and ratings agencies in lifting the economic growth outlook for the Philippines even as they downgraded their projection for the rest of emerging Asia.

"We're a peking duck compared to the region which is a fried chicken," Ravelas said.

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