PHL strong fundamentals to keep interest rates low—DOF
The Philippines would continue to enjoy low interest rates for so long as the country’s macroeconomic fundamentals are kept intact, the Department of Finance (DOF) said.
Based on the DOF Economic Bulletin submitted to Finance Secretary Carlos Dominguez III, maintaining good macroeconomic fundamentals is the best way to keep the local interest rates down as the US Federal Reserve raises its key policy rate.
Dominguez pointed out, however, that the Philippines’ stable interest rate regime could be threatened by the proposal of the Congress to increase the monthly pensions of Social Security System (SSS) beneficiaries starting this January without a corresponding increase in members’ contributions.
“The across-the-board increase in SSS monthly pensions without a corresponding adjustment in the contributions of the members would reduce the fund life of the SSS, possibly prompting a downgrade in our credit rating,” Dominguez said.
In a memorandum sent to President Duterte last Dec. 15, Dominguez and his fellow economic managers—Budget Secretary Benjamin Diokno and Director-General Ernesto Pernia of the National Economic and Development Authority (NEDA)–said that without an accompanying “upward adjustment or restructuring of the contribution rate,” the proposed SSS pension hike would unduly jack up the unfunded liabilities of the Fund from P3.5 trillion to P5.9 trillion.
“The SSS Reserve Fund which is tapped when contributions of SSS members are not enough to cover the benefit payments made to its members, is currently projected to last until 2042.The proposal by the Congress] is foreseen to cut the actuarial life of the fund by 14 to 17 years from 2042 to 2025-2028,” according to their joint memo to the President.
If approved, this congressional proposal “may adversely affect the Republic’s credit rating,” said the three Cabinet secretaries in their memo to Mr. Duterte, and the “SSS would be bankrupt and left with no funds for other members in the future.”
According to Finance Undersecretary and Chief Economist Gil Beltran, the Duterte administration has the capacity to dampen the effects of the impending normalization of US interest rates.
Beltran, who is the DOF’s chief economist, explained that the Philippines enjoys sound fiscal and monetary policies as the government’s fiscal deficit is also kept within manageable limits.
Likewise, he said that the Philippines has successive balance-of-payments surpluses, a comfortable debt ratio and reduced financial risks to the economy.
Last Dec. 4, the US Fed raised its benchmark interest rate for the first time in a year, signalling that rates may also continue to rise faster than expected in 2017.
Emerging markets like the Philippines are now bracing for the impact of a quick rate increase by the US Fed as yields on government IOUs would likely rise as investors seek higher risk premiums.
But based on DOF data, the average primary nominal bond rate had slightly fell ahead of the expected US rate increase from 3.96 percent in 2015 to 3.86 percent in 2016.
“The reversal of US QE [quantitative easing] policies will push up the country’s real borrowing costs, but with improved fundamentals, the rise will be dampened,” Beltran said in his latest report to Dominguez.
He also noted that the rate of increase in consumer prices had remained low as average inflation rate stood at only 1.7 percent as of November 2016.
According to Beltran, the country’s real Treasury Bond rate (10-year term) also dropped by 3.94 percentage points from 4.61 percent to 0.67 percent between 2000 and 2016 owing to improved macroeconomic fundamentals.
During that period, the country’s gross domestic product (GDP) has expanded by above 6.0 percent, while inflation dipped to an average 3.4 percent and the national government’s debt ratio fell to 43 percent as of October 2016.
“This was attained through fiscal strengthening with the passage of the VAT [value-added tax] reform law in 2006, debt management measures, prudent spending and appropriate monetary policy,” Beltran said.
“The credit rating agencies (CRAs) recognized these positive factors and gave the country an investment grade rating in 2013,” he added.
But even before the country attained its investment grade status, Beltran said the government’s real bond rate has already narrowed to an investment grade-equivalent as early as 2008.
“The financial markets recognized the country’s investment grade status earlier than the CRAs did,” Beltran said.
