PHL to gain from lower US credit rating – HSBC

The Philippines tends to gain from a lower credit rating sustained by the US in light of its budget deficit, executives of British-owned Hong Kong & Shanghai Banking Corp. (HSBC) said Tuesday.

New York-based Standard and Poors (S&P) lowered the long-term credit outlook for the US to negative from stable. The rating agency also warned of serious consequences if US lawmakers fail to control the federal deficit.

This would result in higher capital flows toward emerging market, including the Philippines, said HSBC country treasurer Wick Veloso in an interview with reporters.

"If the negative outlook becomes an actual downgrade, the more inflows will go to emerging markets," Veloso said.

Brazil, Russia, India, and China (BRICS) also tend to benefit from lower US outlook.

The US government is expected to post a record budget deficit of $1.5 trillion this year. The failure of the US Congress to reach deal in how to control the deficit in the next two years would prompt S&P to strip the world’s biggest economy of its “AAA" rating making loans more expensive and credit more difficult to obtain for American firms.

"The emerging markets together with BRICS will be the biggest beneficiaries of that kind of action. The rest of the world will receive flows," Veloso said.

Review capital controls

The International Monetary Fund (IMF) has stressed the need for emerging economies and BRICS to review capital controls as capital inflows from advanced economies led by the US, Japan, Europe reach their shores, according to the HSBC treasurer.

"If capital moves out of the US and Europe, it will go to emerging economies," he said.

The US credit rating will reinforce the resolve of most central bank to keep a neutral policy stance as capital moves from developed countries to emerging markets, said HSBC president and CEO Tony Cripps in the same interview.

HSBC president and chief executive officer Tony Cripps said this will reinforce the resolve of most central banks to keep a neutral monetary policy stance and with it the flow of capital from developed countries to emerging markets should persist.

According to the Bangko Sentral ng Pilipinas (BSP), excessive capital flows help stoke inflation pressures and lead to a stronger peso against the US dollar.

Inflation in the Philippines will accelerate to 5.4 percent this year before easing to 4.5 percent in 2012, according to HSBC.

Its inflation forecast for 2011 is faster than the 3-percent to 5-percent BSP target.

Another policy rate hike

The Monetary Board will likely raise the BSP's key interest rates by another 75 basis points this year following the 25-basis-point increase on March 24, Veloso said.

This will bring the overnight borrowing rate to 5 percent and the overnight lending rate to 7 percent.

The March 24 interest rate increase was supposed to help tame inflation amid the escalating global oil and food prices.

The BSP trimmed its policy rates by 200 basis points from December 2008 to July 2009, bringing the overnight borrowing rate to a record low 4 percent and the overnight lending rate to 6 percent to cushion the impact of the global depression.

Monetary authorities believed the Monetary Board decision helped domestic output — as measured by the gross domestic product — to post its strongest growth in 34 years at 7.3 percent last year from 1.1 percent in 2009.

HSBC, however, sees the country's P8.5-trillion economy growing by only 5.4 percent this year and 5.9 percent next year.

The Cabinet-level Development Budget Coordinating Committee has kept its GDP growth forecast within the 7-percent to 8-percent range for this year and next.

Despite the global concerns on Europe’s sovereign debts and rising oil and rice prices, Cripps said that the Philippines will make it through this testy period for the global economy.

"We are very optimistic about the prospects of the Philippines," he said. — VS, GMA News