Asia warned on impact of US monetary policies

By Luis Leoncio 

The Asian Development Bank (ADB) has issued a warning on the adverse impact of the tightening of monetary policies in the United States on foreign capital in the region, including the Philippines. 

In a report, the ADB said a rise in US policy rates would maintain pressure for more outflow of funds.

In its Asian Development Outlook 2015 Update, released last week, the ADB said the continuing progress of economic recovery in America requires the US Federal Reserve (the Fed) to start tightening its monetary policy to forestall unwanted inflation.

“A US interest-rate rise and associated capital flows out of emerging economies appear to put emerging market economies at risk of financial crises, especially related to foreign-exchange rates and debt denominated in foreign currencies, if the capital flows are not managed appropriately,” the ADB said.

It said the Fed action to tighten monetary policies and the coming elections in the Philippines are among the major factors that pose uncertainty on the local economy. The ADB said the outcome of the elections will have an important bearing on policy.

“Risks to the outlook include the unexpectedly slow growth in the People’s Republic of China and the large industrial economies, which would weigh on exports and investment,” it added.

The ADB, however, noted the risks from volatile capital flow are mitigated by the country’s solid macroeconomic fundamentals and robust banking system.

Still, it added: “Raising public investments and continued efforts to strengthen budget execution will be needed to deliver social programs and address infrastructure shortcomings.”

The ADB said pressing ahead with public-private partnership (PPP) reform, through continued improvements in the legal and regulatory frameworks, and project development and monitoring, will also be crucial.

It said the effective implementation of reforms “and further progress in improving regulatory efficiency to reduce the cost of doing business will be key to raising private investment to drive stronger growth and generate more jobs.”

The ADB also indentified the persistently weak government spending as an impediment to the economy, which, it said, is estimated to grow 6 percent this year, down from an earlier estimate of a 6.4-percent expansion.

The ADB said the forecast was trimmed as a result of slow public spending early in the year.

While it expects a 6.3-percent growth next year, it warned that the national elections that year pose “more uncertainty than usual.” The rebound in government spending and election spending in the runup to the national polls next year are expected to support growth the rest of the year and next year.

“GDP (gross domestic product) growth is forecast to rise to 6.3 percent in 2016 on stronger recovery in the major industrial economies that should benefit Philippine exports and investment inflows,” it added.

The ADB added that lower global fuel prices are benefiting consumers and businesses alike, because the Philippines imports 90 percent of its oil requirements. Private consumption is projected to remain robust in light of low inflation and growth in employment and remittances, it added.

Public spending remained the missing link in the Philippine economy, as the ADB said that household consumption accelerated in the first half, driven by higher employment, low inflation and rising remittances.

“Private investment also rose but public spending was sluggish early in the year before rebounding,” it said.

“Net external demand weighed on GDP growth, which slowed to 5.3 percent” in the first half, it added.

Net exports are seen as a drag on GDP growth through 2015 against a backdrop of soft external demand and buoyant import volumes, it said.

“Next year, exports are projected to improve in line with better prospects for the industrial economies,” the ADB added.