Growth expected to stay faster than 6%

THE PHILIPPINES is poised to maintain above-six percent growth over the next four years, S&P Global Ratings said in a report released yesterday, noting that external developments pose the biggest risk to the outlook as domestic consumption and investment remain robust.

Standard Chartered Bank shared a similar gross domestic product (GDP) expansion projection for this year in a separate report, even as it noted that implementation of the government’s infrastructure development plan “has been subdued, so far.”

STILL BELOW GOVERNMENT GOAL
S&P kept its 6.4% growth forecast for the country, after the Philippine Statistics Authority reported on Thursday last week that the Philippine economy expanded by 6.5% between April and June — slightly faster than the first quarter’s 6.4% but slower than the year-ago 7.1% that benefited from an additional lift from expenditures related to the May 2016 general elections.

The second-quarter GDP pace took average first-half growth to 6.45%, just slightly below the government’s 6.5-7.5% target for 2017.

The debt watcher said last quarter’s GDP reading was in line with its latest estimates, which were last adjusted in July.

“We expect strong domestic demand to drive solid GDP expansion over the next few years, at about 6.5% annually,” S&P said in its monthly economic research on Asia-Pacific economies.

Robust consumption and investment activities will remain the main drivers of economic expansion, riding on “solid demographic trends” as more Filipinos enter the work force, S&P said in its report.

Broken down, the credit rater forecasts annual growth at 6.4% in 2018, 6.6% in 2019 and 6.7% in 2020, which factors in expectations of bigger government spending in light of the aggressive infrastructure push coupled with bigger revenues from tax reform.

The government, however, hopes to spur GDP growth to a faster 7-8% annual pace from next year to 2022, when President Rodrigo R. Duterte ends his six-year term, in order to make a bigger dent on poverty.

That compares to the 6.2% average in 2010-2015 under former president Benigno S.C. Aquino III. Last year saw GDP expansion pick up to 6.9%, just below the top end of an official 6-7% target.

It is that kind of GDP growth that, the current administration hopes, will cut by 2022 unemployment rate to 3-5% from 2016’s 5.5% and poverty incidence to 13-15% from 2015’s 21.6%, while raising per capita income to $5,000 by then from $3,550 in 2015.

S&P pointed out that domestic political issues — including the battle to take Marawi City back from militants aligned with the Islamic State that tomorrow enters its fourth month — are unlikely to derail Philippine growth.

Instead, external risks remain the biggest challenge for the economy.

“External factors continue to be the main source of risks — be it rising protectionism overseas, geopolitical tensions, or uncertainty in financial markets that could lead to capital outflows,” the report read.

“The tail risk of a spillover of tension and fighting in the south (between government forces and extremists) appears to have receded significantly.”

Foreign portfolio investments, an indicator of investor confidence, posted a $202.24-million net outflow as of July, reversing from $1.744 billion that entered in 2016’s first seven months.

S&P said inflation does not pose a concern at the moment as it remains benign, but noted that the central bank could raise borrowing rates this semester amid fast economic growth.

Inflation averaged 3.1% in the seven months ended July, just a notch below the BSP’s 3.2% estimate for the entire year and staying within the 2-4% annual target band for 2017-2020.

In comparison, S&P expects the country’s inflation rate to pick up to 3.4% this year and to 3.5% in 2018, before easing to 3.0% in 2019 and further to 2.2% in 2020.

The country’s current account gap — earlier driven by higher commodity prices and now fueled largely by the importation of capital equipment needed for business expansion and the government’s infrastructure drive — is also expected to ease due to the recent decline in world oil prices.

S&P maintained its “BBB” rating with a “stable” outlook on the Philippines in April, with the view that domestic conditions remain conducive for sustained economic growth. A stable outlook means that the country’s ratings are unlikely to change over the next year or so.

CAVEAT
In a separate Aug. 21 report, titled: “Growth rebounds on government spending,” Standard Chartered said the second quarter’s 6.5% GDP pace “was better than expected” by some in the market though it was “in line with our forecast.”

“The Philippines’ Q2 growth surprised on the upside, at 6.5% year-on-year, in line with our forecast,” the bank said, adding that it was maintaining a 6.5% full-year 2017 forecast for the country that will make it “the fastest growing” economy among the six major Southeast Asian states.

It noted, however, that “… while the government remains committed to spending more on infrastructure, actual expenditure remains subdued for now.”

The government targets its infrastructure expenditures to rise to 5.32% of GDP (P847.22 billion) this year and further to 6.68% (P1.17 trillion) in 2018 from a mere 2.7% average in 2010-2015. By 2022, the target is for infrastructure expenditures to hit P1.899 trillion, equivalent to 7.45% of GDP. This plan lies at the core of the government’s “Build, Build, Build” infrastructure development plan that targets P8.44 trillion in such spending in 2017-2022.

Standard Chartered said inflation “is likely to remain subdued in the near term” — giving projections of 3.1% for 2017 and 3.2% (from 3.0% initially) for 2018 — hence, “… [w]e expect the BSP to keep the policy rate on hold throughout 2017 and 2018.” — Melissa Luz T. Lopez and Elijah Joseph C. Tubayan