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BY MANNY VILLAR
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Wednesday, February 21, 2018
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FOR BANGKO Sentral Governor Nestor A. Espenilla Jr., the honeymoon is over. President Rodrigo Duterte appointed Espenilla to replace Governor Amando Tetangco, Jr., who stepped down in July 2017 after serving the maximum two terms as head of the Bangko Sentral ng Pilipinas (BSP).
Espenilla came at the helm of the monetary authority at a time when the Philippine economy was being hailed as a growth leader in Asia. The 6.7-percent increase in Gross Domestic Product (GDP), which was achieved without the election-spending boost in the previous year, affirmed the capability of the economy to sustain robust growth.
The economy has been thriving on a low-interest environment, as the Monetary Board, the BSP’s policy-making body, has kept policy rates unchanged since 2014.
The stock market posted impressive gains last year, with the main index (Philippine stock index) closing at a record high of 8,558.42 points on December 29, the last trading day of 2017, reflecting an annual growth of 25.1 percent year-on-year. Year-to-date (up to January 26), the PSEi had gained 5.6 percent.
The domestic market’s performance was mirroring the performance of global markets, particularly the United States.
In the first month of 2018, the US stock market was “on fire,” with the Dow Jones Industrial Average hitting a historical high of 26,000 in the morning of January 16. According to reports, the rush among investors to buy stocks had driven up average prices by almost 8,000 points since the election of President Donald Trump in 2016.
And then, the ax fell. The Dow plummeted 1,175 points at the close, down 4.6 percent, to 24,346 points, which reports noted as its biggest drop since the European debt crisis in August 2011.
The drop in the US market sent ripples around the world, including the Philippines. On February 5, the PSEi plunged 194.75 points (2.2 percent) and ended the trading day at 8,616 points.
Local share prices also reflected the recovery in Wall Street in the days following the rout.
Analysts say the stock market drop was not totally unexpected, because the improving US economy, coupled with prospects of high corporate earnings, have been attracting investments in the equities. In other words, the high share prices were bound to come down at one point or another.
Some factors cited as the trigger to the drop include anticipation that the Federal Reserve would raise interest rates, as well as increasing average wages, which could fuel inflation.
For the Philippines, the scenario has changed rather quickly – from a stable economic environment and prospects for a steady growth – to one mixed with a certain degree of volatility.
The nationwide inflation rate ended at 3.3 percent in December, bringing the average for 2017 to 3.2 percent, well below the 4-percent ceiling set by the BSP.
In January 2018, however, inflation increased to 4.0 percent, the high end of the 3-4-percent target for this year. The increase was attributed mainly to higher prices of food, alcoholic and non-alcoholic beverages, tobacco and petroleum products.
During its first rate-setting meeting for this year last Feb. 8, the Monetary Board raised its inflation forecast to 4.3 percent for 2018 (from 3.4 percent) and to 3.5 percent (from 3.2 percent) for 2019.
The volatility in the foreign markets, higher inflation in the domestic economy and other challenges will require the government, particularly the monetary authorities, to stay alert and prepared to cope with the challenges coming our way.
For Governor Espenilla, the current volatility in the global markets and challenges in the domestic front will test his mettle for the first time.
I am convinced that the governor will handle it well. It is very comforting to know that we have a very competent man at the top of the BSP, a career central banker who had been exposed to global and domestic challenges long before he was appointed governor.
The new governor clearly expressed his stance during a speech last month, when he said the BSP’s strategic direction under his watch would be “about being pro-active, staying on top of developments, and continuing building additional buttresses and buffers on already strong foundations, so that our economy would be able to prosper and withstand potential shocks.”
Under the current situation, that is exactly what we need – to preserve our gains and sustain our growth.
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This piece first came out in Business Mirror on Feb. 12, 2017 under the column “The Entrepreneur.” For comments/feedback e-mail to: mbv.secretariat@gmail.com or visitwww.mannyvillar.com.ph./PN
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