(News Feature)Sustained improvement of PHL fundamentals to ease impact of Fed rate hikes

Ensuring continued strength of Philippines' domestic fundamentals will cushion any impact of the rising US interest rate, an Economic Bulletin submitted to Finance Secretary Carlos Dominguez III said.

Finance Undersecretary and Department of Finance (DOF) chief economist Gil Beltran, in the Bulletin, said the country's sound fiscal and monetary policies as well as continued surplus in its balance of payment (BOP) position, comfortable debt ratio and lower financial risks were additional boost for the economy.

On Dec. 4, 2016, the Federal Reserve hiked its rates by 25 basis points to between 0.5 percent to 0.75 percent on the back of firmer signs of economic growth in the US. Some analysts have projected three additional hikes this year.

This is widely expected to increase yields on government securities as investors look for higher risk premiums.

However, DOF data show that average primary nominal bond rate declined ahead of the Fed rate increase to 3.86 percent from 3.96 percent in 2015.

"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 the report.

Beltran also cited that inflation remained low, with the end-November 2016 average at 1.7 percent, lower than the government's two to four percent target range.

In the whole of 2016, rate of price increases averaged at 1.8 percent.

Beltran said real rate of government-issued 10-year Treasury bond (T-bond) fell by 3.94 percentage points to 0.67 percent from 4.61 percent between 2000 and 2016 due to continued improvement of domestic fundamentals.

Growth of the economy, as measured by gross domestic product (GDP), in recent years have improved with average growth now at over six percent from around three percent in the past.

Beltran said this was achieved through combination of fiscal strengthening, reform of the value added tax (VAT) law, debt management activities, prudent spending and appropriate monetary policy.

He said the credit rating agencies had recognized these improvements, which resulted in the granting of investment grade ratings to the Philippines in 2013 and further upgrades the following year.

He, on the other hand, pointed out that even before the investment grade ratings were given, investors had recognized this development as early as 2008 as shown by the narrowing of bond rate to investment grade equivalent.

Source: Philippines News Agency

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