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Growth to remain below target — BMI

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“[W]e are sticking to our view that economic growth is likely to moderate over the coming quarters,” BMI said in a May 16 report. “Even as the Philippines continues to enjoy positive demographics, the economy is showing signs of overheating, and we expect the deterioration in the business environment to weigh on private investment.” -- PHILIPPINE STAR/MIGUEL ANTONIO DE GUZMAN

By Melissa Luz T. Lopez
Senior Reporter

BMI RESEARCH has raised its growth forecast for the Philippines, but still expects that the pace will log below the government’s full-year goal amid softer private investments and tighter financial conditions.

The Fitch unit now sees 2018 gross domestic product (GDP) growth at 6.5%, faster than their previous 6.3% estimate, “on the back of a stronger-than-expected” performance during the first quarter.

The Philippine economy expanded by 6.8% from January-March led by a 13.6% surge in government spending and a 12.5% increase in capital formation, according to the Philippine Statistics Authority. Of this, public construction grew by 25.1%, versus a 6.8% climb in private sector activity.

Despite its higher forecast, BMI said the government’s 7-8% GDP growth target for the year will be missed, with current conditions pointing to easing growth for the months ahead.

“[W]e are sticking to our view that economic growth is likely to moderate over the coming quarters,” BMI said in a May 16 report.

“Even as the Philippines continues to enjoy positive demographics, the economy is showing signs of overheating, and we expect the deterioration in the business environment to weigh on private investment.”

Still, BMI expects that growth will continue to trend above six percent, cementing the Philippines’ position as one of the fastest-growing economies in Asia. Such confidence is boosted by the expansionary fiscal policy taken by the Duterte administration, focused on its aggressive infrastructure spending push.

“Given that the Philippine government has embarked on fiscal reforms to boost revenue and deleveraged considerably since the early 2000s, this should allow the Duterte administration to continue to keep up its strong spending in the near term,” the research firm said.

The country’s young population will keep manufacturing as well as business process outsourcing industry upbeat, and will likewise keep the retail and consumer goods sector buoyant, it added.

Capping these favorable terms are rising inflation and higher interest rates, BMI said.

“While the Monetary Board increased its benchmark interest rate by 25bps to 3.25% on May 10, inflation will likely remain an issue over the coming months,” BMI analysts said, noting that they expect another rate hike from the Bangko Sentral ng Pilipinas (BSP) by the year’s end.

“Such a move may slow domestic demand and will likely act as a dampener to growth,” the report noted.

The BSP’s rate hike last week marked the first tightening move in nearly four years at a time of five-year highs for inflation and robust economic growth.

Prices of widely used goods hit a fresh peak in April as headline inflation came in at 4.5%, accelerating from March’s 4.3% and 3.2% a year ago. This pushed the year-to-date average to 4.1%, above the government’s 2-4% target range for 2018.

Inflation is expected to keep rising and hit a peak towards the end of the year, with added price pressures expected from world crude rates as well as wage hike petitions.

This, as BSP Governor Nestor A. Espenilla, Jr. previously acknowledged that inflation may have “spread somewhat” to cover more goods. However, he earlier said the economy’s growth momentum is robust enough to accommodate higher interest rates.

The local business climate is also seen to weigh on private investments, which has exhibited slower growth as of the first quarter. BMI pointed to the six-month closure of Boracay island as well as threats to shut down open-pit mining operations as “stifling” investor confidence.

Multilateral lenders and credit raters also see economic growth remaining robust but falling below the government goal this year.

The International Monetary Fund and the World Bank expect Philippine GDP to expand by another 6.7% this year to match the growth pace last year, while the Asian Development Bank forecasts a slightly faster 6.8% expansion.

For their part, Fitch Ratings and Moody’s Investors Service likewise expect the economy to expand by 6.8% this year, while S&P Global Ratings sees full-year GDP growth at 6.7%.