Moody's upgrade ups market confidence in early Q4 of 2013

CEBU, Philippines - Moody's' decision to upgrade the Philippines' credit rating to investment grade, reflecting the continued positive outlook on the country's economy, lifted market confidence in early fourth quarter of  2013.

A survey conducted by the Bangko Sentral Ng Pilipinas (BSP) revealed that while the market confidence have improved at the entry of fourth quarter last year, concerns over the potential impact of typhoon Yolanda and the decision by the US Federal Reserve to start tapering its monthly bond purchases in January dampened investor sentiment toward the end of the review quarter.

Nonetheless, the country's debt spreads narrowed, while the peso maintained its stability. However, stock market pared its gains with the main index retreating from its level in the previous quarter.

According to the survey, the real gross domestic product (GDP) expanded by 7.0 percent in third quarter of 2013, driven by strong household spending, exports, and capital formation on the expenditure side, and by solid gains in the services sector on the production side.

Indicators of demand also continue to be solid given generally favorable consumer and business sentiment.

Vehicle and energy sales remain brisk, while the Purchasing Managers' Index *PMI) continues to signal strong growth in new orders and production, especially in the services sector.

Sustained credit growth and ample liquidity are also seen to provide further boost to domestic demand going forward.

Meanwhile, inflation for the whole year of 2013 averaged 3.0 percent. This marks the fifth consecutive year that inflation remained within the official target beginning 2009.

According to BSP, inflation accelerated to 3.4 percent from the quarter-ago rate of 2.4 percent due to higher food and non-food inflation.

Food inflation increased owing to tighter domestic supply conditions from weather-related disruptions as well as stronger demand during the holiday season.

Non-food inflation rose similarly due to higher electricity rates on account of the increased generation charges at the Wholesale Electricity Spot Market (WESM).

Likewise, inflation was higher in fourth quarter of 2013 than in the previous year, but remained lower compared with year-ago rates. The number of CPI (consumer price index) components showing inflation rates above the 5.0 percent threshold also increased, accounting for a bigger proportion of the CPI basket.

Baseline forecasts indicate that inflation will likely settle within the inflation target for 2014 and 2015. Underlying demand-side pressures continue to be manageable, while inflation expectations remain firmly anchored.

Moreover, temporary period of strong liquidity growth is not expected to translate into significant inflationary pressures given the temporary nature of the adjustments related to the BSP's new guidelines on the access of trust entities to the Special Deposit Account (SDA) facility.

At the same time, the rising demand for money appears to be consistent with sustained improvements in the economy's absorptive capacity.

Nevertheless, the risks to future inflation appear to be skewed to the upside due mainly to transitory supply-related pressures.

This highlights the need to communicate the importance of non-monetary measures being undertaken by other government agencies to promptly address supply-side price pressures and manage inflation expectations.

Going forward, BSP vows to remain guided by its primary objective of maintaining price and financial stability. It stands ready to deploy appropriate measures as needed to ensure sustainable and broad-based economy growth. —/JMD (FREEMAN)