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Fiscal strength, households
tagged cushions vs. shocks

Posted on January 09, 2016

THE PHILIPPINES has enough buffers to cushion the economy against shocks, with “prudent” fiscal policies and strong consumer spending seen keeping growth prospects intact despite weak government disbursements and a looming spending ban ahead of the presidential elections, according to two analyses released on Friday.

In its Jan. 8 release of the “Asia-Pacific Sovereigns Chart of the Month”, debt watcher Fitch Ratings said the Philippines is on better footing than its neighbors to weather market volatilities.

Across Asia and the Pacific, Fitch noted that “[d]omestic demand, particularly household consumption, has stayed relatively robust compared with weakening external demand”, but cautioned that “further economic shocks could quickly change this.”

It added, however, that “[e]conomies like the Philippines have strong external and public finances that provide room for policymakers to use countercyclical tools and manage negative output gaps.”

On Thursday, the government reported that state spending increased by 13% annually to P1.992 trillion as of November, though it missed a P2.335-trillion goal for those 11 months.

It also reported that the country’s gross international reserves edged up to $80.614 billion at end-December from $79.54 billion a year ago -- enough to cover 10.3 months worth of imports of goods and payments of services and income, and equivalent to 5.5 times the country’s short-term external debt. The central bank considers reserves adequate if the level can finance three months worth of imports or cover 100% of the country’s foreign liabilities.

Offsetting the impact on growth of a 6.2% annualized fall in merchandise export sales -- which contribute up to 40% to national economic output -- to $48.871 billion in the 10 months to October, household spending -- which contributes more than 60% -- surged by 6.3% annually in the third quarter of last year, outpacing the 4.9% recorded in 2014’s comparable three months.

The third quarter of last year also saw a 12.1% increment in private sector investments. “Outside of the Philippines, investment has slowed more substantially, particularly in the private sector as business confidence wanes,” Fitch noted, explaining that “part of the slowdown may reflects cyclical factors, and also the lower potential growth of countries most economically linked to China”.

The Philippines currently holds a “BBB-” rating -- the minimum investment grade -- with a “positive” outlook from Fitch, which expects the country’s economy to grow 6.1% this year against the government’s 7-8% target.

With gross domestic product (GDP) growth logging 5.6% in the nine months to September last year, the government had said in November that a 6% full-year pace was “very much likely”.

In a separate report, analysts of the Australia and New Zealand (ANZ) Banking Corp. Ltd. said “prudent” fiscal policies of the current administration should help keep the country’s growth momentum intact even after President Benigno S.C. Aquino III steps down from office on June 30.

ANZ economists Eugenia Fabon Victorino and Glenn B. Maguire said the Aquino government would be leaving behind an “impressive economic legacy” to see the country through the change in leadership in June and quell fears of a reversal of economic gains made during his six-year term, despite slower-than-programmed public spending and a looming infrastructure spending ban ahead of the May 9 presidential polls.

“We assume that the legal restrictions on major spending 100 days before the elections will now limit President Aquino’s ability to introduce any new major programs in the coming months. Thus, the prudent fiscal policies of the Aquino administration should enable the next president to hit the ground running, fueled by a cash-rich treasury,” the analysts said in an economic outlook.

ANZ also projects the Philippine economy to grow by 6.1% in 2016 -- still among the fastest in Asia next only to China and Vietnam -- buoyed by strong household consumption, steady remittance growth and election-related spending.

“We expect the Philippines to continue to outperform its regional peers, likely posting a GDP growth of 6.1% year-on-year in 2016, before easing to 5.8% in 2017,” the report read.

“Of all the economies in the ASEAN, the Philippines seems almost perfectly positioned to benefit from the global and regional backdrop that is tilting towards services, a dynamic we outlined in this note. The economy is Asia’s most service-oriented economy and the country will find itself on a steady footing in a world of unusually weak goods trade,” it noted.

“An unusually high level of domestic demand as a percent of GDP will likely insulate it from the ongoing global trade recession. Despite the slowdown in remittance growth, domestic demand held firm in 2015, reinforcing our view that sources of income growth are expanding,” it added.

“Above-trend growth in household consumption has offset the persistent weakness in public spending,” the report noted further, adding that “election-related spending will likely support public and private consumption expenditures to rise in unison in 2016.”

The bank economists expect GDP growth to log 7.3% and 7% for the first two quarters of 2016, respectively, before slowing to 5.3% in the third quarter and at 4.7% in the fourth quarter.

Slower-than-programmed government spending is still flagged as a “dampener” to growth, while consumer spending and services are expected to remain the economy’s anchors amid persistent weakness in global demand.

Though analysts have repeatedly flagged the May 9 national elections as a key political risk in the short term, ANZ Research said “it is important to note that the strong structural aspects of the economy should enable the Philippines to maintain its growth momentum, regardless of who takes control of the Malacañang on 30 June 2016.” -- Melissa Luz T. Lopez