Over the hump?

PHILIPPINES - Forecast 03 Sep 2019 by Romeo Bernardo and Christine Tang

Domestic economic growth has slowed, and external clouds are gathering. Can GDP growth rebound to above 6%? The next 18 months will depend upon greater accommodation from fiscal and monetary policies, as well as more clarity in government reform efforts to counter the many downside risks.

Analysts’ GDP growth forecasts for 2019 have dropped from 5.8%-7.1% at year’s start to 5.4%-6.4% as of the latest consensus forecast, mainly reflecting poorer-than-expected H1 growth. Too, a no-end-in-sight U.S.-China trade conflict and rising regional tensions imply that risks are to the downside. We are confident that H2 will be better than H1, and that 2020 will be better than 2019. But we don’t think the incline will be steep, mainly because we are unsure that public investments can rebound sharply in H2, given arduous public procurement processes and the onset of the rainy season. Odds are that much government infrastructure spending will be pushed out to 2020. Likewise, it is unclear how much stimulus easier monetary policy can deliver in the near term. But the hope is that falling interest rates, expected to drop by 75 bp by yearend, will whet risk appetites anew. We think 2020 GDP growth will settle at around 6.2%, up from 5.8% this year.

Inflation continued its brisk descent, to 2.4% in July, and is expected to average below 2% during the rest of the year. New excise taxes on oil and tobacco in 2020 are not expected to significantly affect the headline rate, which we expect to average below 3% next year. As long as the Fed does not cut its rate further, the BSP will likely pause after the next policy rate cut, likely by another 25 bp in September. We have penciled in an end-year policy rate of 4%, keeping it steady through 2020 for now. On the other hand, if the U.S. Fed changed its stance, we’d expect the BSP to keep pace.

Balance of payments data through July continue to show a strong turnaround, from net outflows of $3.7 billion in a seven-month period in 2018 to net inflows of $5 billion this year.

Recent events tell us that, despite what will likely continue to be a difficult relationship, Philippine-China economic relations will keep growing, at least as long as President Rodrigo Duterte remains in office. Bilaterial trade continues to grow, with China remaining the Philippines’ largest trading partner (17% of trade in 2018). Chinese visitors continue to flock to the Philippines, and Chinese FDI continues to rise (to about $200 million in 2018). Many are monitoring developments in the infrastructure projects that China has agreed to finance, particularly the $248 million Kaliwa Dam.

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