Mounting prices, weaker peso to hit consumption

THE PHILIPPINE ECONOMY may grow slower than initially expected as rising rates due to stubborn inflation and the peso’s continued depreciation could affect consumption, Moody’s Analytics said on Wednesday.

In a note titled “APAC Outlook: The Coming Test of Resilience,” Moody’s Analytics said Philippine gross domestic product (GDP) is likely to expand by 6.8% this year, slower than the 7.2% forecast it gave in August. Still, this falls within the government’s 6.5-7.5% target for the year.

On the other hand, it raised its 2023 forecast to 6.4% from 5.4% previously, still slightly below the government goal of 6.5-8%.

Philippine GDP grew by 7.4% in the second quarter, bringing the first semester average to 7.8%.

The lower 2022 GDP outlook is due to the impact of the Bangko Sentral ng Pilipinas’ (BSP) rate hikes amid the peso’s depreciation and inflation on the economy, Moody’s Analytics Associate Economist Sonia Zhu said in an e-mail.

“Rising interest rates will squeeze household spending, making business investments and government debt servicing more costly,” Ms. Zhu said.

“However, the biggest risks facing the Philippines are currency weakness and persistent inflation (import-inflation). The BSP will be pressured to move in tandem with the US Federal Reserve to support its currency,” she added.

Ms. Zhu said their latest GDP forecast also takes into account the economy’s first-half performance.

“The June quarter GDP release showed that the economy is slowing and contracted compared to the March quarter,” she said.

Private consumption is a major growth driver for the economy, contributing around three-fourths of GDP each year.

The BSP has hiked borrowing costs by 175 basis points so far this year as it seeks to keep inflation in check. BSP Governor Felipe M. Medalla has also signaled more hikes as the Fed’s hawkish stance and its impact on the currency could pose an upside risk to prices.

On Wednesday, the peso closed at a new record low of P58 per dollar, down by 52 centavos from the previous day, as markets awaited the Fed’s decision overnight.

Headline inflation eased slightly to 6.3% in August from a near four-year high of 6.4% in July, bringing the eight-month average to 4.9%, both above the BSP’s 2-4% target for the year.

Moody’s Analytics said strong infrastructure spending will support the economy’s growth.

“Infrastructure spending will do the heavy lifting to support the country’s growth next year as President Ferdinand R. Marcos, Jr. pledged to expand [former President Rodrigo R.] Duterte’s infrastructure program, setting aside 13.5% of the 2023 fiscal budget for infrastructure spending in 2023,” Ms. Zhu said.

“Infrastructure development has been the backbone of the economy and better connectivity will help to attract foreign investments,” she added.

For the Asia-Pacific (APAC) region, Moody’s Analytics Chief Asia-Pacific Economist Steven Cochrane said the growth outlook has likewise been dampened by rising interest rates to combat accelerating inflation.

“In this environment, APAC central banks continue to normalize policy interest rates. Aside from China and Japan, policy makers have their eyes not only on domestic inflation but on the fast pace of policy increases by the Federal Reserve that are strengthening the value of the dollar,” Mr. Cochrane said.

“Along with China and Japan, the currencies of India, South Korea, Malaysia, the Philippines, and Thailand are under some pressure. Not only will the APAC central banks need to raise rates further through the end of this year and into next year, but they will have to stay at high levels for longer if the US federal funds rate remains at a high rate through 2024 as is now expected,” he added.

Moody’s Analytics said the region’s fastest-growing economies, such as Malaysia, Vietnam, and India, are likely to see a slowdown next year as their post-pandemic recovery tapers. — K.B. Ta-asan