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By Bettina Faye V. Roc, Sub-Editor

PHL growth outlook cut, faster than most

Posted on February 27, 2015

PHILIPPINE economic growth could remain well below the government’s official target this year and next, Standard & Poor’s said, but the country will continue to outpace its Southeast Asian peers, with consumption expected to drive expansion.

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In a report, titled: “Stronger US Economy And Lower Oil Prices Aren’t Boosting Asia-Pacific Growth,” that was released yesterday, the debt watcher said the country’s gross domestic product (GDP) growth could come in at 6.1% this year before picking up to 6.3% by 2016.

S&P’s economic growth forecast for the Philippines for this year is down from a 6.3% estimate given last month, while that for next year is up slightly from its earlier 6% call.

“Among the ASEAN-4, the Philippines continues to be the outperformer, with its growth outlook for the next two years remaining at above 6%,” the report said, referring to the Association of Southeast Asian Nations.

ASEAN-4 refers to the Philippines, Indonesia, Malaysia and Thailand, which the debt watcher says could collectively expand by 5.5% this year and next. Per country, S&P estimates GDP growth in Indonesia to come in at 5.6% this year and 5.7% in 2016; Malaysia’s at 4.6% in 2015 and 5% in 2016; and Thailand’s at 3.9% this year and 4% next year.

Across Asia and the Pacific, the Philippines is also expected to be among the fastest-growing economies, with S&P seeing the area’s growth at just 5.4% this year and next. Only China and India are expected to grow quicker than the Philippines.

Still, the credit rating agency’s estimates are far below the government’s growth goals of 7-8% for 2015 and 2016, and are the latest in a growing list of below-target projections for the Philippine economy over the near term such as those of the World Bank (6.5% for 2015 and 2016 and 6.3% for 2017), the International Monetary Fund (6.6% for 2015 and 6.4% for 2016), and Fitch Ratings (6.2% for 2015 and 6% for 2016).

The Philippine economy expanded by 6.1% last year, buoyed by a better-than-expected 6.9% growth in the fourth quarter. However, the full-year print fell below the official 6.5-7.5% target.

“The Philippines’ growth outlook continues to be well-supported by strong private consumption, which in turn is driven by favorable demographics particularly in terms of a young and growing middle class,” S&P economist Vincent R. Conti said in an e-mail when asked what would drive the economy’s expansion.

“The strong consumption momentum also spurs investment, which builds more capacity and helps to sustain a decent pace of economic growth moving forward,” Mr. Conti added.

He said risks to the country’s outlook are in line with those S&P also tagged as downsides to growth for the whole Asia-Pacific region in its report: tepid growth in external demand as China’s and Japan’s economies slow down and the lack of transmission of the recovery in US to Asian exports.

“However, a resilient domestic economy driven by long-term demographic factors could help mitigate these risks,” the S&P economist said.

The debt watcher said in its report yesterday that risks to Asia’s outlook are now “more balanced,” but the expected boost from two positive external developments, namely: improving prospects in the US and falling oil prices, has not been as good as expected.

“The trade-driven pickup in activity that we expected elsewhere in Asia-Pacific has yet to materialize. Exports and industrial production growth remain choppy but still lackluster overall at the onset of 2015 despite strong US consumer spending,” it said.

“Meanwhile, the sharp fall in global oil prices has translated into much lower inflation, which has given central banks the space to either loosen monetary policy or shift from a tightening to a neutral stance. This should be positive for domestic demand in most Asia-Pacific economies, but at the moment, the lack of external demand appears to dominate the region’s overall growth outlook,” the debt watcher noted.

It added that with inflation falling across the region and growth also looking tepid, central banks are now “sitting on the fence with an easing bias.”

However, with the US Federal Reserve seen hiking its rates from near-zero by midyear, S&P said policy makers in Asia could choose to either remain accommodative, or to follow the US central bank and also tighten.

With Asia-Pacific growth seen to be “slightly less responsive to lower oil prices and a strengthening US economy,” the debt watcher expects majority of Asia’s central banks to choose the former and sees very few interest rate hikes this year as authorities look to spur economic activity.

“[T]he Philippines is our exception, where we expect rate hikes to begin toward the end of 2015,” S&P said, expecting a 50-basis-point (bp) hike in rates for this year, and 25-bp more in 2016.

Higher rates should help keep the rise in prices at bay, as the debt watcher sees Philippine inflation at 2.8% this year and 3.6% next year -- within the government’s 2-4% target range though higher than 2.3% and 2.5% forecasts, respectively.

The central bank’s Monetary Board, in its first 2015 meeting last Feb. 12, left policy settings unchanged for the third time in a row amid expectations that inflation remains firmly anchored and domestic activity will continue to be strong. Overnight borrowing rates were kept at 4.0%, while those for overnight lending stayed at 6.0%. Special deposit account rates were also kept steady at 2.50%, while the reserve requirement ratios for banks were maintained as well.