BSP keeps tabs on possible inflationary impact of OFW remittances

BSP keeps tabs on possible inflationary impact of OFW remittances
By Des Ferriols
The Philippine Star 01/10/2006
http://www.philstar.com/philstar/NEWS200601100702.htm

Dollar inflows from overseas Filipino workers (OFWs) have been the bright spot in the country’s economy but monetary officials are wary over the imminent inflationary impact of increased spending that might eventually require a tightening of monetary policies.

Although still concerned about the volatility in world oil prices, the Bangko Sentral ng Pilipinas (BSP) said monetary policies in 2006 would be pitched against the risks of excessive liquidity building up due to dollar remittances.

This year, the BSP expects OFW remittances to reach at least $11.8 billion, possibly as much as $13 billion, including remittances that are not coursed through the banking system.

BSP Governor Amando M. Tetangco Jr. said the sheer volume of remittances from Filipinos working abroad could lead to a build-up in excess liquidity, especially since OFW money is mostly being used for consumption and not investment.

Tetangco said OFW inflows could be a cause of inflationary pressure since the overall 2006 economic growth is expected to continue at a "reasonable" pace with no danger of overheating.

He said growth would be driven mainly by services and industry but agriculture is also expected to contribute due to favorable weather conditions this year. But he said the rise in oil prices over the past year would likely exert some impact on domestic demand, particularly on consumption spending.

Tetangco expects inflation to be higher this year, but the recent strengthening of the peso and easing of world oil prices from their peak in 2005 will would help counterbalance the effect of the value added tax adjustment.

"Nevertheless, the risks to inflation continue to be mainly on the upside," Tetangco said. "This is because oil prices are still likely to remain high relative to their historical trend given limited production capacity."

Tetangco said the BSP still expects 2006 inflation to be in the range of 7.5 to 8.2 percent, way above the inflation target of five to six percent for the whole year.

The BSP governor said there was also specific concern on the dollar inflows from OFW remittances and investments. "These would give us astrong external position this year and with healthy inflows, the exchange rate would likely remain stable at current levels."

However, Tetangco said there were still risks to price stability, especially since economic managers have to ensure macro-economic stabilization in the short term while also preserving the momentum.

"Monetary policymaking at the BSP will, therefore, be pitched against the volatility of world oil prices and the build-up excessive liquidity owing to dollar inflows," he said. "We are also looking at the possible exchange rate reaction to the narrowing of interest rate differentials and adverse shifts in the public’s inflation expectations."

"The public can expect that the BSP will be thorough in ensuring that these risks will not be allowed to materialize," he said. "The BSP will deny any breeding ground for any incipient inflationary pressures, especially those coming from the demand side."