China's Reflation, Asian �de-coupling�?
Comment of the Day

January 20 2012

Commentary by Eoin Treacy

China's Reflation, Asian �de-coupling�?

Thanks to a subscriber for this interesting, heavyweight 132-page report (10mb) by Ajay Kapur and colleagues at Deutsche Bank. Here is a section on the Philippines:
Policy and economics: The expected cut in policy rates by Bangko Sentral ng Pilipinas (BSP) was widely anticipated and telegraphed by the BSP itself. Inflation eased considerably to 4.2% in December from a peak of 5.2% earlier in the year. The central bank has communicated the need to “adjust” policy rates to “promote growth” in the face of potential external drags this year. Apart from inflation, government under-spending was a major drag on GDP growth last year. In the first 11 months of 2011, public spending on infrastructure was only half of the full-year budget of P244bn, with the shortfall accounting for more than 1% of GDP. Mindful of this, the government has increased infra budget by 15-20%, and has begun disbursing funds as early as January, hoping to get construction underway before the rainy season begins in July. Moreover, about 15 projects to be conducted via public private partnership (PPP) have been slated for launch this year. These projects could provide a sharp uplift to GDP growth in 2012.

Eoin Treacy's view An American friend who has been based in the Philippines for a number of years once remarked that they have learnt to expect a currency crisis once every couple of years and that this propensity deterred inward investment. That contention was certainly justifiable between 1995 and 2004 when the Peso more than halved against the US Dollar in a series of abrupt devaluations.

However that has not been true over the last 8 years. Even during the thick of the financial crisis, the Peso fell less than other currencies and it has since recouped the majority of its decline. Governance has improved in the Philippines over the last few years and the middle classes are expanding. All of this helps to encourage investor interest. The stock market's move to new all-time highs following a more than yearlong consolidation will also prick the interest of internationally oriented investors.

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