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Moody’s says overheating farfetched; FMIC, UA&P see Q1 growth past 7%

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Domestic demand remains robust.

By Melissa Luz T. Lopez
Senior Reporter

THE PHILIPPINE ECONOMY is far from overheating, with growth poised to clock faster even as inflation quickens further, according to a global debt watcher and a monthly analysis released on Monday.

Moody’s Investors Service allayed fears that the Philippine economy could overheat, noting that growth can be expected to be sustained over the medium term as domestic activity is still robust.

“We believe that overheating risks in the Philippines are not yet material,” the credit rater said in a report on Monday.

“Our view is based on expectations that current inflationary pressures are in part due to transitory factors, infrastructure investment and favorable demographics will lift potential growth to meet rapid demand growth and the external position will remain roughly balanced.”

Moody’s kept its “Baa2” rating with a “stable” outlook for the Philippines in June last year, but aired concerns on whether the economy can absorb ramped up infrastructure spending under the “Build, Build, Build” program of the Duterte administration.

The debt watcher had said the P8-trillion infrastructure spending plan is “unlikely to be achieved in… entirety” but should still provide substantial boost to gross domestic product (GDP) growth.

Now, Moody’s said an increasing working-age population, rising productivity and better infrastructure should be able to “mitigate overheating risks” and boost long-term potential output.

Moody’s expects Philippine GDP to expand by 6.8% this year, faster than 2017’s 6.7% though still short of the government’s 7-8% target.

Faster price increases as well as double-digit credit growth can likewise be absorbed by strong GDP growth, as well as a sound and stable financial system.

Inflation averaged 3.7% for the first two months of 2018, factoring in higher fuel prices, a weaker peso, and the impact of the Tax Reform for Acceleration and Inclusion (TRAIN) law.

Meanwhile, bank lending jumped by another 19.5% in February from 19% the preceding month, with the additional credit flowing to production activities.

“Currently, we do not believe that strong credit growth poses material financial stability risks for the Philippines given the banking system’s buffers, including high capitalization, reliance on deposit funding and benign asset quality,” the credit rater explained, while citing a measly share of non-performing loans despite the steady rise in borrowings.

FASTER GROWTH
Robust factory output and construction likely fuelled an above-seven percent GDP growth in the first quarter, analysts at the First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in a separate report.

Record foreign direct investment inflows and the local infrastructure spending push gave a “strong start” to the Philippine economy, putting it on track to hit the government’s 7-8% growth goal for 2018.

“[W]e see GDP growth accelerating to beyond seven percent pace in Q1, given the strong multiplier effects of job growth, and robust manufacturing and construction sectors,” the economists said in the March issue of The Market Call.

This compares to The Market Call’s 7-7.5% forecast for the entire year.

The Philippine Statistics Authority is scheduled to report first-quarter GDP data in the morning of May 10, hours ahead of the central bank’s third monetary policy review for 2018.

Citing government data, FMIC and UA&P said 2.4 million jobs were created in January while manufacturing output surged by 21.9% year-on-year.

At the same time, they noted that concerns have since shifted towards faster inflation driven largely by the TRAIN which took effect this year.

They see inflation clocking 4.1% for March and April, which would mark fresh three-year highs if realized.

The central bank has said that monetary authorities expect prices to keep rising in the next few months, but noted that such pressures are seen to be temporary and do not warrant interest rate adjustments for now.