Brief Macro: UK Trip – Wake up to Deflation Risk and more

In this briefing:

1. UK Trip – Wake up to Deflation Risk
2. Philippines: Institutional Reforms that Promote Macro Stability

1. UK Trip – Wake up to Deflation Risk

By Bo Zhuang, Chief China Economist

• London-based investors are turning cautiously optimistic on China’s growth outlook amid the latest easing measures in January
• There is still little awareness about the rising deflation risk
• Interest in the trade war has subsided

2. Philippines: Institutional Reforms that Promote Macro Stability

• Legislation on rice tariffication signed by President Duterte into law allows for liberal rice imports, thus, effectively dismantling the State regulatory control over the grains sector. This bodes well for stabilizing food inflation that has been the scourge of low income groups. Lower food prices over time help anchor inflation expectations while ‘freeing’ up purchasing power among low income households for redeployment to support non-food demand. Rice imports would be slapped tariffs with the proceeds targeted at developmental support for vulnerable local rice farmers.

• Market segmentation (between local and imported rice), bias for affordable food choices among households with limited incomes, and fiscal interventions to attain food security, would spare the local market from the heavy assault of rice imports. 

• As these laws on rice tariffication and BSP charter amendments gain traction, we expect the BSP to depend largely on market-based, policy tools in inflation and liquidity management. As high bank reserve ratios lose policy relevance, we sense the likelihood of a conversion to a single-digit reserve ratio over the medium-term. This policy outcome augurs for lower intermediation costs among banks that hopefully translates into better yielding, regular savings and time deposits that could appeal to low income depositors. 

• Inclusive of the TRAIN law package 1 that’s intact despite the high inflation challenge, the recent institutional reforms provide the backdrop for another round of investment-credit ratings upgrade.