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Credit Suisse flags PHL growth risks

Posted on June 23, 2017

CREDIT SUISSE tempered its growth forecast for the Philippines due to a “disappointing” pickup in household spending after an election-driven boom last year, coupled with some weakness in employment data.

Growth of household spending, which contributes about 70% of national output, is expected to slow due to a weak labor market. -- BW FILE PHOTO
“We now expect the Philippines’ GDP (gross domestic product) to surprise on the downside in 2017, which contrasts with our previous positive view on growth. We cut our 2017 GDP forecast to six percent, down from 6.4%,” the Zurich-based bank said in a report published yesterday.

If realized, this would lag behind the 6.9% economic growth clocked in 2016, and below the government’s 6.5-7.5% target for the year.

Economic managers of President Rodrigo R. Duterte kept the growth target intact during their review earlier this month, amid expectations that the economy’s sound fundamentals will remain “stable” and with exports seen to “improve,” alongside a boost from aggressive state spending.

Philippine GDP picked up by a slower-than-expected 6.4% in the first quarter, coming from a 6.6% climb during 2016’s final three months.

“Driving our forecast is our expectation that private consumption will moderate further in large part due to an unusually weak labor market,” Credit Suisse analyst Michael Wan said, pointing out “worrying” developments in the jobs sector.

Mr. Wan said job growth has “declined sharply” over the past two quarters, due to more workers dropping out of the labor force.

The Philippine Statistics Authority said 94.3% of the country’s labor force had jobs as of April, better than the year-ago 93.9%. However, the participation rate -- the percentage of the total number of persons in the labor force to the total population aged at least 15 years old -- slipped to 61.4% from 63.5%.

One factor that could have contributed to a weakening of the labor market was uncertainty over contract-based work arrangements, especially in the early months of the current administration.

“The significant uncertainty surrounding ‘endo’ [end of contract] practices since last year could have impacted employers’ hiring decisions in the lead-up to 2017... The bad news, however, is that companies, perhaps in particular small- and medium-sized companies, could have cut back employment more sharply than anticipated in the run-up to these regulations this year.”

The bank economist said slow labor growth will weigh on household spending, with the full-year consumption growth seen to moderate to 5.7% from 6.5% in 2016. Consumer spending is the key growth driver of the Philippine economy, having accounted for over 70% of GDP last year.

“Ultimately, we do not think that other drivers can offset the weakness in consumption,” Credit Suisse said, pointing out that there are slim chances that the state’s big-ticket construction projects will see substantial progress in the second half of the year.

A slowdown in government spending would likewise drag economic expansion after a seasonal surge observed in 2016, having been an election year.

Credit Suisse also pointed out a “sequential weakness” in infrastructure and operating expenses, which have both eased from a year ago.

The government posted a P30.2-billion budget deficit as of end-April, 47% narrower than the year-ago P57.5 billion. Public spending went up by two percent from the previous year, versus a six percent rise in revenue collections.

The current administration is looking to spend P860.7 billion on infrastructure projects this year, forming part of an P8.4-trillion ambitious spending plan until 2022.

Merchandise export growth is also expected to ease coming from a double-digit increase in the first half of the year that was a turnaround from contractions a year ago.

With the tempered growth outlook, Credit Suisse said the Bangko Sentral ng Pilipinas (BSP) will not have to adjust borrowing rates this year, against the bank’s previous forecast of one rate hike.

Some analysts still expect at least one rate increase by the central bank later this year, after three hikes in the United States since December 2016.

BSP Governor Amando M. Tetangco, Jr. has said the central bank does not have to match Federal Reserve actions every time, as local monetary authorities remain focused more on domestic conditions. -- Melissa Luz T. Lopez