Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. expects policy rate increases to encourage capital inflows into the country.
With inflows from overseas Filipinos keeping reserve levels steady, Tetangco expressed optimism that the country would be able to maintain a surplus despite widening trade deficit.
Tetangco said, however, that capital inflow and the resulting strength of the peso was only a collateral effect of the policy rate hike, adding that the main concern of monetary officials is to keep inflation in check.
But Tetangco said he is not expecting a flood of investments as the strains in global financial markets have persisted and are likely to continue, indicating that risk aversion would also remain for a while.
Tetangco expressed optimism that the economy would survive the global slowdown as the economy continues to grow despite increasingly hostile conditions.
“There is resilience here because growth is broad-based and notwithstanding the difficult times, the magnitude of growth is quite respectable,” Tetangco said.
Tetangco said the banking sector was also stronger as a result of the reform measures that have been implemented over the past years.
“There is resilience here because our major financial intermediaries have remained strong enough to continue channeling savings into investment, and therefore supporting production and more sustainable employment,” Tetangco said.
But Tetangco said the central bank is still wary of the spillover effects from the slowdown in the US and the global economy as well as higher risk aversion brought about by the financial market turmoil in the West.
“These could pose downside risks to output growth that could impact negatively on the banking system’s growth,” he explained.
Tetangco said, the country’s external payments profile remained a major source of strength for the economy, adding that for the first six months of 2008, the balance of payments surplus has been sustained at $1.9 billion.
The Asian Development Bank earlier said the country’s current account surplus would likely go down this year.
“There are risks given the increase in the trade deficit but remittances and income receipts from services coming from a vibrant business process outsourcing industry should provide the needed support,” he said.
Tetangco said that for the first quarter of 2008, the current account remained in surplus of about three percent of GDP despite a wider merchandise trade deficit due to higher oil and food costs.
“The stability of the current account is due to the sustained expansion in remittances,” he said.
“Latest data show remittances for Jan-May 2008 totaled $6.8 billion, growing year-on-year by 14.7 percent from the comparable period a year ago.”