S&P warns Asian subsidies to worsen economies
19-JUL-2008 Intellasia | Yehey
Jul 19, 2008 - 7:00:00 AM
|
|
Standard & Poor's (S&P) Ratings Service warned that state subsidy of food and fuel in countries like the Philippines compounds existing economic difficulties by bloating the government's budget deficit and widening its trade gap.
The credit-rating company's warning came ahead of the Bangko Sentral ng Pilipinas' (BSP) decision to raise its key interest rates by 50 basis points. After the increase, the BSP's overnight borrowing and lending rates now stand at 5.75% and 7.75%, respectively.
In raising its rates a second time in a row, the BSP said "concurrent shocks to the economy, such as the persistent surge in oil prices and spikes in commodity prices have contributed to elevated inflation readings."
BSP Governor Amando Tetangco Jr. said the central bank's action intends to reduce the risks to inflation expectations and the long-term cost to growth from prolonged high inflation.
Besides the Philippines, S&P also pointed to similar risks in other Asian countries like India, Indonesia, Taiwan and Vietnam. These countries have increased interest rates to contain a clear uptrend in inflationary pressure building from rising food and energy prices.
Rising costs of food and beverages can have widespread implications on consumer prices, given that the share in the total-consumption basket can often be as high as 50%. Risks to inflation globally are arising from a combination of demand-side and supply-side drivers, S&P said.
In the Philippines, the increase in inflation was driven primarily by high oil and food prices, which led to higher wages and transport fares. For businesses in particular, S&P said the downside of higher inflation is likely to result in compressed corporate margins, as inflation raises input prices without the ability to pass the increase on fully to the end-user amid an economic slowdown.
Furthermore, rising inflation is likely to apply upward pressure on yields and spreads while lowering nominal returns for holders of corporate bonds vis-à-vis other securities that offer a hedge against inflation, the credit rating firm said.
It said high economic growth in emerging markets will drive inflation to increase faster this year. Inflation in these markets is expected to rise to 8.8% this year, higher than last year's 5.9%. This will be driven not only by rising fuel and commodity cost but also of high economic growth.
"In the emerging markets, several consecutive years of high economic growth, along with accommodative fiscal and monetary policies and credit policies, are accentuating the inflation trend," S&P said.
Inflation in Asia Pacific excluding Japan is expected to reach 6.7% this year, higher than 4.4% last year.
"The credibility of central banks is seen increasingly at risk in both developed and emerging markets. Ironically, even in the US, inflation fears have risen, notwithstanding the significant deflationary threat from a material housing slow-down," S&P said.
It said the Federal Reserve would likely hold interest rates until the second quarter of 2009 on continued evidence of pronounced economic weakness.
Besides raising rates, the BSP also adjusted upwards its inflation forecast for this year and next. deputy Governor Diwa Guini-gundo said the BSP raised its inflation forecast to a range of 9% to 11% this year compared with its earlier forecast of 7% to 9%. For next year, monetary authorities forecast inflation to reach 6% to 8% from an earlier forecast of 4% to 6%.
"[The] inflation outlook is more elevated to what we saw on June 5," Guinigundo said. "Food and oil prices have not shown a more benign environment going forward. We want to be pre-emptive, inflation expectation is beginning to increase," he said.
Guinigundo said the Monetary Board based its decision on the actual June inflation, which rose to a 14-year high of 11.4%. Also leading to the rate adjustment was the weakness of the exchange rate, as well as expected adjustments in wages, electricity and transport fares.
Based on its assessment, Guini-gundo said the Monetary Board expects the country's economic growth to slow to 5.6% this year from 7.3% last year. This is below the government's forecast of 5.7% to 6.6%.
|
 |
|
Advertising
