Report sees Q4 GDP off to good start

A CONFLUENCE of bigger state spending, muted inflation and continued recovery of merchandise exports could propel gross domestic product (GDP) growth faster this quarter, First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in a joint report.

“Infrastructure spending’s 17.8% jump in October and positive exports performance… along with the rebound in foreign investment and slower inflation, augur well for a further acceleration of GDP growth in Q4,” FMIC and UA&P said in the December issue of The Market Call Capital Markets Research that was e-mailed to journalists on Tuesday.

“We think that PH is off to a good start in Q4, tracking the above economic indicators and following GDP acceleration in Q3” at 6.9%. The third-quarter clip took the three-quarter pace to 6.7% against the government’s 6.5-7.5% target for the entire 2017.

“[W]e believe that our 6.5-7% FY target will easily be hit,” the report read, noting that “[e]xports should rise at a faster rate in Q4 [from the third quarter’s 8.3%] as the synchronized upswing in the global economy make its impact.”

It added that it expected inflation to “remain at 3.3% in December,” flat from November. That December estimate, if realized, would result in a 3.17% full-year inflation average against the central bank’s 3.2% forecast for 2017.

FMIC and UA&P also noted that national government infrastructure and capital outlays picked up by 17.8% in October as total state spending surged by 28%, “setting the stage for even faster GDP growth in Q4.”

AND AS 2018 STARTS…
Analysts at ANZ Research said in a separate report that rising interest rates and a weaker peso will be key economic trends in 2018, until the central bank tightens policy to ease pressures on the currency.

They said these themes will likely persist through 2018 alongside faster inflation and upbeat economic growth.

ANZ sees the Philippine economy expanding by 6.4% next year, still robust although slower than the 6.7% forecast for 2017.

Inflation is expected to 3.5% in 2018 and could pick up further following the rollout of the first tranche of the government’s tax reform package that kicks in on Jan. 1.

With “elevated” inflation, “[w]e expect Philippine interest rates to continue to face upward pressure in 2018,” ANZ analysts said in the report.

“Apart from rising US rates, domestic peso liquidity has been on a decline, as banks channel funds for overnight lending and other investments,” ANZ said in its Asia Economic Outlook published earlier this month.

The US Federal Reserve raised rates for a third time this year during its Dec. 12-13 review as it maintained plans for three more hikes next year. This development is seen to drive up global yields and trigger capital outflows from emerging markets like the Philippines towards the US.

Money supply grew by 14.8% to P10.3 trillion as of October, according to latest data from the Bangko Sentral ng Pilipinas (BSP).

However, results of the central bank’s weekly term deposit auctions showed a shrinking amount of excess liquidity held by banks, as these funds are deployed to more loans, foreign exchange purchases and withdrawn by clients.

“Until some modest tightening comes about to help eliminate the imbalances, investors will stay cautious and continue to favour short duration. This, coupled with peso underperformance, will cap foreign interest in the RPGB (global bonds) market,” the global research firm said.

On the other hand, concerns about the Philippines’ widening current account deficit are seen to keep the peso weak, having been dubbed the “worst performer” in the region in 2017. ANZ even sees the peso-dollar rate touching P52.50 by end-2018 unless the central bank steps in.

The peso touched a fresh 11-year low in October when it traded at P51.77 versus the greenback. The local unit has since recovered to return at P50.14-per-dollar as of Friday’s session.

“Any delay in monetary tightening will increase pressure on the PHP,” the bank said, noting that a rate hike from the BSP will ease pressures on the currency and keep local yields competitive.

“[W]ith a small deficit, the willingness of foreign investors to fund the currency matters more. At present, foreign inflows have been muted, given the relatively low interest rates on offer, especially with the real policy rate in negative territory.”

ANZ, however, noted that the central bank remains “reluctant” to tighten monetary policy. Central bank officials have said that they do not have to move in sync with the Fed in raising rates, as domestic conditions do not warrant adjustments just yet. — with Melissa Luz T. Lopez