Philippines still basking in extended economic sweet spot

But here's a dark new twist.

According to DBS, the central bank (BSP) is unlikely to budge on the benchmark overnight borrowing rate (OBR). The economy is currently in an extended sweet spot of high growth and low inflation.

However, when viewed from an external stability standpoint, the surge in portfolio inflows has proved to be challenging.

Over the past few quarters, BSP has responded by letting the peso appreciate, accumulated foreign reserves, reduced rates for the special deposit accounts (SDAs) and implemented more stringent rules for non-deliverable forwards (NDFs).

Here's more from DBS:

The risk lies with the point where the cycle turns and inflows can quickly reverse into outflows, threatening economic stability.

Moreover, peso strength can erode the competitiveness of Filipino exports. While cutting the OBR can be a more effective way to reduce inflows, BSP has more recently refrained from further lowering the rate.

Over the past four years, asset prices including the stock market and property prices (especially higher-end properties) have surged.

A direct cut of the OBR would further stoke speculative interest in asset markets. As such, we think that indirect methods such as another cut in the SDA rates or additional macro-prudential measures are likely to be announced.

Moreover, if sterilization costs are viewed to be too high, a hike in the reserve requirement ratio is also a possible measure.