BSP sees economy 'insulated' from Europe

By Daniel Bases, Reuters

Posted at Jun 18 2012 10:09 AM | Updated as of Jun 18 2012 07:16 PM

NEW YORK - The Philippines central bank is confident its economy, enjoying its strongest burst of growth in two years during the first quarter and a falling inflationary trend, can sustain this scenario even if the euro zone economy continues to shrink, its deputy governor told Reuters on Friday.

Europe's deepening sovereign debt crisis, weak economy and potential upheaval if Greece exits the euro area currency, will send shock waves across the world's financial markets.

The euro zone as a whole, is the Philippines' third largest export market after the United States and Japan, said Deputy Philippines Central Bank Governor Cy Amador.

"Definitely our baseline incorporates a European slowdown, in fact a European recession," Amador said in a phone interview as she traveled in the United States meeting with investors as part of a larger government entourage promoting the economy.

"We are very mindful of the spillover that Europe can have on the Philippine economy. I guess the sentiment is we are not immune by any means, but we are quite well insulated," she said.

Amador said the bank is ready with liquidity provisions should Europe's problems create credit strains.

"We have done quite a bit of scenario stress testing," she said.

The Philippines central bank left its key interest rate unchanged at a record low 4 percent on Thursday, confident in its forecast that inflation will come in at 3.1 percent this year, below the mid-point of the 3 percent to 5 percent target range. The inflation forecast for 2013 is 3.4 percent.

"In the past we were looking at the balance of risk (for inflation) shifting toward the upside because oil prices were gyrating quite significantly. But because of economic slowdown, oil prices have been behaving. That removed a little bit of the upside risk on inflation," Amador said.

Economically, it is in an enviable position compared to Europe or the United States, with first-quarter gross domestic product growth of 2.5 percent, driven mainly by a 24 percent surge in government spending, domestic demand and an export rebound.

Domestic demand will push the economy forward, Amador said, and the current inflationary environment can handle more government spending.

"Should the government, for whatever reason decide to ratchet up infrastructure spending, again just for argument purposes, the inflation risks remain manageable," she added.