Central bank has room for easing, says report

The central bank is unlikely to touch benchmark interest rates in the first half despite suggestions of an exit from an easy monetary stance adopted amid the global economic slump. The Bangko Sentral ng Pilipinas (BSP), in fact, still has room to lower policy rates by three quarters of a point since the government can no longer stimulate the economy given its worsening fiscal performance, First Metro Investment Corp. and the University of Asia and the Pacific (UA&P) said in a market research. "While the [US Federal Reserve] and, presumably, the BSP are developing an ‘exit strategy,’ we do not think that there will be a change in the policy rates in the first semester of the year," the report said. It cited slowing liquidity growth, while lending to companies had slightly inched up. Yearly liquidity growth slowed to 8.3 percent in December from 12 percent in November, while private sector credit growth moved up slightly to 8.3 percent from 7.1 percent in the previous month, it pointed out. "Given the still very manageable inflation rates this year — well within [the central bank’s] 2010 to 2011 targets — we think [the] BSP not only has room to keep policy rates until [the fourth quarter], but would do well to ease further by at least 75 basis points," First Metro and UA&P said. The ultimate goal of a policy rate cut, they added, is to bring down 25-year housing mortgage rates to single-digit levels, since housing construction is a major economic driver. "[Housing] has high multiplier effects not only on output, but also on employment. Besides, the backlog in residential housing is nearly four million, while annual output remains just over 200,000, so there should be no fear of an asset price bubble," the report said. It added that interest rates, in general, would be softer in the coming weeks, as maturing government securities and strong remittances from Filipinos abroad provide huge liquidity to the financial system. Stock forecast The research also noted that in the near term, fiscal deficit woes and sputtering growth in the European Union, compounded with uncertainties over future bank regulations, would likely continue to increase volatility in global equities. "The sovereign risk concerns in the euro zone will probably increase fund flows into [emerging markets] due to their safer investment environment. In our view, the Philippine equity market should be one of the more attractive markets among [emerging markets] and will likely benefit from the euro zone’s woes," it pointed out. First Metro and the UA&P said its outlook for the Philippine economy for the remaining half of the year is "moderately positive." They expect economic growth to come in below 3% in the first quarter due to a 2-3 percent decline in crop output brought about by El Niño, and a strong peso that will limit the stimulative effect of remittances from Filipinos overseas. "Growth may only be slightly faster in [the second quarter] due to heightened election spending. Inflation will remain range-bound between 4 and 4.6 percent in the coming months despite the recovery in crude oil and metallic mineral prices, because of weak domestic aggregate demand," the report said. S&P outlook In a related development, Standard & Poors (S&P) noted in a market outlook that while 2009 was a difficult year, 2010 is looking considerably brighter for credit and equity markets in the Asia-Pacific region. "One of the region’s key challenges will be successfully managing exit strategies as it moves from crisis aversion to building sustainable growth," the global credit watcher said in a report titled "Asia-Pacific Markets Outlook 2010." S&P noted that the region’s gradually improving economic outlook, which has encouraged an increased risk appetite combined with financial system stability and the ensuing improvement in liquidity, had led to a stock market recovery. In her article, "2010 Looks Positive For Asia-Pacific Equity Markets But Returns Will Be Lower," S&P Equity Research Director Lorraine Tan shared outlooks and recommendations for what she described as an attractively priced market in which economy recovery has been largely priced in. "Overall, we maintain our view that the ‘easy’ money has been made," she said. "At current valuation levels, investors have discounted the global economic recovery and are looking ahead to a resumption of demand-led earnings growth in 2010," she pointed out. "Stock picking is likely to be more important in 2010, with fewer bargains available particularly as headwind builds. Having said this, with limited alternatives, equities are expected to outperform, and as they say, ‘a rising tide lifts all boats,’" she added. But Tan said increased volatility was likely as prices rise, "particularly as more countries start to raise interest rates, bringing about concerns of reducing liquidity and anxiousness to protect gains." — Norman P. Aquino, GMANews.TV