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[av_heading heading=’We’re hot, but not overheating’ tag=’h3′ style=’blockquote modern-quote’ size=” subheading_active=’subheading_below’ subheading_size=’15’ padding=’10’ color=” custom_font=” av-medium-font-size-title=” av-small-font-size-title=” av-mini-font-size-title=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=” admin_preview_bg=”]
BY MANNY VILLAR
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February 7, 2018
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BLAME it on the impressive performance of the economy—traditionally, it should have been lackluster, coming after an election year—but gross domestic product actually grew by 6.7 percent in 2017, just a bit slower than the 6.9 percent in 2016, which was boosted by spending related to the presidential election.
In addition, the prognosis for this year is very good, as I discussed in last week’s column. No less than the World Bank said it expected the Philippines to continue to be the fastest-growing economy in the Association of Southeast Asian Nations (Asean).
Jitters have been creeping up among some analysts and institutions, which were perhaps still seeing the Philippines as a laggard, although it had already proven its resilience to challenges and is now actually competing, instead of catching up, with its peers.
Thus, laggard has been replaced with a new term, “overheating,” which is the opposite of the label attached to the Philippines in the past. Online Business Dictionary (http://www.businessdictionary.com) defines overheating as: “Situation where the aggregate demand is increasing so fast that it cannot be met by the economy’s productive capacity and is, thus, liable to cause or fuel inflation. It is the condition of ‘too much money chasing too few goods.’”
London-based credit-rating firm Fitch Ratings, Singapore-based DBS Bank, Moody’s Investor Service and the local unit of ING Bank have been cited in news reports as saying fast credit growth, rising inflation and other factors were raising the risks of overheating for the local economy.
In a statement following its regular consultation with local authorities late last year, the International Monetary Fund said the “combination of high-credit growth, buoyant private investment and fiscal expansion without tax reform could lead to overheating of the economy.”
For its part, the Asian Development Bank sees no signs of overheating, while it expects the economy to sustain its growth momentum through 2018 on the back of infrastructure spending and implementation of the tax-reform program.
In its Asian Development Outlook 2017 Update released last September 26, the regional lender noted that, instead of a rising inflation, one of the factors that may indicate overheating, inflation had remained within the Bangko Sentral ng Pilipinas’s (BSP) target range of 2 percent to 4 percent.
In a separate statement, the BSP said inflation for the whole of 2017 averaged 3.2 percent, well within the official target.
Rising liquidity, technically known as M3 (the broadest measure of money in the financial system), and credit growth are also among the factors that could raise the risks of overheating. In the Philippines, however, liquidity and credit growth has not always been on a straight uphill climb.
For example, preliminary data from the BSP show that domestic liquidity (M3) grew by 14.0 percent year-on-year to about P10.4 trillion in November 2017, slower than the 14.8-percent expansion in the previous month.
In a separate report last December, the BSP said preliminary data on outstanding loans of commercial banks, net of reverse repurchase placements with the BSP, expanded at a slower rate of 19.2 percent last November, from 19.9 percent last October. Meanwhile, bank lending inclusive of RRPs grew by 18.3 percent last November, from 18 percent in the previous month. On a month-on-month seasonally adjusted basis, commercial bank lending for loans net of RRPs and loans inclusive of RRPs increased by 1.2 percent and 1.9 percent, respectively.
Loans for production activities — which comprised 88.4 percent of banks’ aggregate loan portfolio, net of RRP — grew albeit at a slower rate of 18.5 percent last November, from 18.7 percent last October.
Growth in loans for household consumption decelerated to 20.6 percent last November, from 23.4 percent last October. The acceleration in the growth in credit-card loans was offset by the slower increase in motor-vehicle loans and salary-based general-purpose loans, as well as the decline in other types of household loans.
Experts, including banks, have been projecting, or proposing, that the BSP increase its policy rates (the interest imposed on BSP loans or borrowings from private banks), which are used by private institutions in determining interest rates on private individual or corporate borrowers.
Higher interest rate, which also means higher inflation, is a tool to fight overheating because it slows down credit growth, and leads to slow demand.
The Monetary Board, the highest policy-making body of the BSP, has maintained the policy rates since their last adjustment in September 2014 in line with its mandate to maintain price stability.
My perspective as a businessman is that our economy is far from overheating. Much as I would like it, we have not fully achieved our potential growth — we need to grow faster and sustain a high-paced growth.
While there is ample room for growth, there is no room for complacency. Vigilance, which has enabled me to prepare for any challenges in my line of business, should also help the government and the private sector in coping with risks of overheating.
Thus, I welcome the BSP’s continued monitoring of internal and external developments that may affect the domestic economy.
Overheating could be the big spoiler in the robust and fast growth of the economy. Fortunately, the Bangko Sentral has developed, based on its experience with past global crises, a culture of vigilance. This, in turn, has made reforms in the banking industry a continuing tradition rather than a one-time exercise aimed at correcting a specific glitch.
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This piece first came out in Business Mirror on Jan. 30, 2017 under the column “The Entrepreneur.” For comments/feedback e-mail to: mbv.secretariat@gmail.com or visitwww.mannyvillar.com.ph./PN
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