S&P Global Ratings has bumped up its growth forecast for the Philippines, inspired by bets that domestic consumption will pick up further this year, enough to offset a slowdown in exports and other shocks from a trade row between the United States and China, the world’s biggest and second-biggest economies, respectively.
The credit rater now expects the Philippine economy to expand by 6.7% this year, faster than the previous forecast at 6.5%.
If realized, this will match the growth pace clocked in 2017 but will fall short of the government’s 7-8% annual target until 2022, when President Rodrigo R. Duterte ends his six-year term, that is supposed to result in significant cuts in both unemployment and poverty rates within that period.
“We expect an acceleration of consumption this year, driven by continued strong demographic trends plus a boost from the income tax cuts, to counter a moderation in export contribution in the second half of the year,” the debt watcher said in its monthly report published last week.
S&P’s 2018 growth forecast matches those given by the International Monetary Fund and the World Bank.
S&P also sees brighter prospects next year. Philippine gross domestic product (GDP) is seen growing by 6.8% in 2019 — faster than an earlier estimate of 6.6% — before returning to 6.7% in 2020.
Strong domestic demand will enable economic growth to remain robust despite some easing in merchandise exports, the debt watcher said, noting that bigger disposable incomes held by Filipinos will support household spending, which contributes about 60% to GDP.
Effective Jan. 1, Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law cut personal income tax rates but offset this with the removal of some value-added tax breaks; higher fuel, automobile, mineral and coal excise tax rates, as well as new levies on sugar-sweetened drinks and cosmetic surgery, among a host of other items. TRAIN has been cited as the cause for accelerating inflation, which surged to 4.3% in March — the fastest in at least five years. The Bangko Sentral ng Pilipinas (BSP) expects full-year inflation at 3.9%, versus the first-quarter average of 3.8%.
Despite this, S&P sees inflation remaining within the central bank’s 2-4% target band for the full year. For 2018, the overall pace of price increases is expected to average 3.6%, which S&P expects to be met with three policy rate hikes from the central bank.
At the same time, S&P said it was “closely watching” a potential trade war between the United States and China. “Besides having the US as a major trading partner, the Philippines also supplies a significant amount of intermediate inputs into China’s exports. With the current account not as strongly in surplus relative to previous years, a trade shock could increase the Philippines’ exposure to foreign funding and potential sudden capital outflows,” the debt watcher warned.
BSP Governor Nestor A. Espenilla, Jr. said it is “too early” to tell how the US-China trade row will pan out, but warned it will limit net exports’ contribution to Philippine GDP. China and the US are two of the country’s biggest trading partners, according to the Philippine Statistics Authority. Goods from China accounted for a fifth of total imports — the biggest segment — as of end-February, while the US received 14.7% of Philippine goods. — Melissa Luz T. Lopez