BSP needs to tighten policy – Bear Stearns

Bear Stearns said the Bangko Sentral ng Pilipinas (BSP) may have to “face the embarrassment” of tightening its monetary policy in the face of rising inflation.

Bear Stearns said the BSP might have lowered its policy rates prematurely, with local prices being affected by rising prices for fuel and food imports, particularly rice.

However, Bear Stearns said that as foreign exchange inflows continue, the Philippines would finish the year as a net foreign creditor and no longer a debtor, giving the Arroyo administration some financial flexibility despite its imminent failure to balance the budget.

In a report, Bear Stearns said the Philippines still lagged by three to four months behind Indonesia where inflation rate was now at 8.17 percent.

“(But) in both cases, monetary authorities may face the embarrassing task of raising these rates again in the coming months,” said Bear Stearns analyst John Stuermer.

According to Stuermer, the price of rice has emerged as a “particularly sensitive” issue with the government investigating reports of rice hoarders, threatening harsh penalties for price and supply manipulation.

On the whole, Stuermer said the rise in the inflation rate had a negative impact on the peso which fell to 41.70-to-a-dollar, compared with its highest point of 40.275 to $ in February.

Stuermer said Bear Stearns also noted the fiscal results for the first two months of the year and predicted that the budget is not likely to be balanced this year.

Finance officials reasoned that the increase in the budget deficit to P32.9 billion resulted from increased spending on infrastructure which would have been good for the economy.

According to Stuermer, however, the government might end up spending more to subsidize fuel and food prices as well.

“Typically, the budget position improves in the latter half of the year when frequent rainstorms and typhoons make it much more difficult to undertake infrastructure projects,” Stuermer said.

“The bottom line is that a balanced budget is most unlikely this year,” he concluded.

However, Stuermer said that as long as the deficit could stay under P50 million, it would not have to be a problem because the country’s current accounts are expected to remain in surplus.

Stuermer explained that the country is projected to continue the rapid build up of foreign assets of commercial banks as well as foreign exchange reserves as investments and remittances remained robust.

“The net result is that the Philippines is likely to remain a net foreign creditor, not a debtor,” Stuermer said. “This gives the government additional financial flexibility.”