MUFG Bank said it upgraded its view on Philippine economic growth in 2022 to 6.7% from 6.5% previously, citing stronger-than-expected performance in the first half.

MUFG Bank analyst Sophia Ng, in a note issued on Monday, said the upgraded growth outlook was due to the “robust” 7.8% growth posted in the first half.

“Given the robust 7.8% growth rate in 1H22, our revised forecast still reflects our assumption of a slower growth rate in 2H22,” she added.

GDP growth in the second quarter slowed significantly to 7.4% from 12.1% a year earlier and 8.2% in the first quarter, according to preliminary data from the Philippine Statistics Authority (PSA).

“Factors that led to a slowdown in growth in Q2 were within our expectations, but the overall growth rate is higher than what we projected earlier this year,” Ms. Ng said.

MUFG’s new projection falls within the 6.5-7.5% full-year growth target set by the Development Budget Coordination Committee.

According to MUFG, inflation will likely be the main drag on private consumption until 2023, as will volatility in net goods exports.

“Inflation has risen much faster than expected so far this year and is likely to be the main impediment to private consumption through 1H23,” Ms. Ng said.

Preliminary estimates from the PSA indicate consumer price index growth of 6.4% year on year in July, driven by food and transport costs.

July headline inflation was the highest since the 6.9% posted in October 2018. 

In the year to date, inflation averaged 4.7%, up from 4% from a year earlier. This was also lower than the revised 5.4% forecast of the Bangko Sentral ng Pilipinas (BSP). 

“Higher interest rates and elevated levels of inflation are likely to continue to (impede) private consumption in 2H22. This is already evident in Q2 when private consumption added just 5.8 percentage points (ppt) to growth in Q2 from 7.4 ppt in Q1,” Ms. Ng said.

“As inflation is the biggest threat to the consumption-led economy, the BSP would have to continue to tighten monetary policy after 175 bps of cumulative rate hikes done so far this year,” she added.  

The central bank has raised benchmark rates by a total of 175 basis points (bps) so far this year, including the 50-bp increase on Aug. 18, bringing the benchmark rate to 3.75%.

Rates on the overnight deposit and lending facilities were also raised by 50 bps to 3.25% and 4.25%, respectively. MUFG sees the BSP hiking by 75 bps more before the year ends to bring inflation back within target.

Meanwhile, MUFG said the merchandise trade deficit will continue to widen and drag down overall growth for the rest of the year.  

“This is particularly in view of widening trade deficits brought about by the higher import value of oil and non-oil commodities and greater demand for capital goods as the government ramps up infrastructure spending,” Ms. Ng said.

The merchandise trade deficit hit another record in June despite slowdowns in the growth of imports and exports, according to the PSA.

Preliminary data show imports growing 26% year on year to $12.487 billion in June. This was lower than the revised 30.2% in May and 42.4% in June 2021.

Exports rose 1% year on year to $6.644 billion in June, against the revised 6.4% posted in May and 18.9% a year earlier.

This brought the balance of trade in goods — the difference between exports and imports — at a record monthly deficit of $5.843 billion in June.

Still, the Philippines is expected to be one of the fastest growing economies within the Association of Southeast Asian Nations region.

“A growth rate of 6.7% is also considered to be robust and slightly stronger than the average growth rate recorded during pre-pandemic times between 2012-2019 at 6.6% and last year’s 5.7% expansion,” Ms. Ng said.

MUFG said disruptions to economic activity look unlikely as President Ferdinand R. Marcos, Jr., promised not to re-impose lockdowns and the administration’s intent to continue the ‘Build, Build, Build’ infrastructure program.

This will likely increase government spending and attract more investment in the construction sector, she said. — Keisha B. Ta-asan