MANILA: The Philippines is among the Asian economies most exposed to the combined risks of a potential “super” El Nino, high US interest rates and domestic policy uncertainty, according to MUFG.
In a note to clients, the bank flagged three factors that it said would need close monitoring and could increasingly drive divergence in Asian asset prices.
The first is the risk of a super El Nino and its potential interaction with earlier spikes in energy prices, which could feed through into higher food costs and inflation.
The second is the possibility of further US Federal Reserve rate hikes and elevated Treasury yields, although MUFG stressed this is not its base-case scenario.
The third is rising domestic policy uncertainty, which could trigger greater capital outflows or weaker inflows, with currency depreciation becoming a growing constraint for policymakers.
“India, Indonesia, and the Philippines could be more vulnerable when you look at the totality of all three risks combined,” the bank said. Last week, Bangko Sentral ng Pilipinas governor Eli Remolona Jr said the May inflation data due on June 5 would be a key input for the Monetary Board’s next policy decision.
Consumer prices rose 7.2% from a year earlier in April, the fastest pace in three years, as higher energy costs tied to the Middle East conflict quickly spilled over to other household essentials.
The April surge marked the second straight month inflation breached the central bank’s 2% to 4% target range.
In response, the Philippine central bank raised its key policy rate by a quarter point to 4.5% at its April 23 meeting amid a “deteriorating” inflation outlook.
The central bank said inflation may average 6.3% this year and 4.3% in 2027.
Policymakers said they were “committed to fulfilling its primary mandate of slow inflation and will take necessary actions to ensure inflation returns to its 3% target within a reasonable time”.
Remolona said while the peso depreciation could fuel inflation, it could also boost exports and narrow the country’s trade deficit. — Philippine Daily Inquirer/ANN
