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Fitch Solutions says Philippines to ‘struggle to reverse its weakening growth momentum’

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ECONOMIC GROWTH will likely ease further this year in the face of heightened global trade tensions and “deteriorating” business conditions, Fitch Solutions Macro Research said following the release of disappointing official 2018 data.

The economic research outfit said it was keeping its 6.1% forecast for gross domestic product (GDP) growth this year, slower than the 6.2% clip clocked in 2018.

If realized, this would miss the 7-8% growth goal set by economic managers of the current administration.

“We at Fitch Solutions reiterate our view that the Philippine economy will struggle to reverse its weakening growth momentum over the coming quarters owing to tighter monetary conditions, the potential for a re-escalation of global trade tensions, as well as a deteriorating business environment,” the unit of Fitch Group said in a report published Friday.

The Philippine Statistics Authority (PSA) reported that GDP picked up by 6.1% in 2018’s fourth quarter, below market expectations of a 6.3% expansion and the 6.5% increase posted in 2017’s last three months.

The resulting full-year three-year low 6.2% fell short of the state’s downward-revised 6.5-6.9% growth target.

Growth slowed due to a deceleration of factory output and agriculture, despite a surge in government spending.

It added that strong state spending on infrastructure will be “insufficient” to carry the country to a faster GDP growth path, with signs that investments are also slowing.

The administration of President Rodrigo R. Duterte has targeted GDP growth to grow 7-8% annually in his six-year term spanning mid-2016 to mid-2022 from the 6.3% average clocked in former president Benigno S.C. Aquino III’s term in 2010-2016, by spending much more on infrastructure development. So far, GDP growth averaged 6.45% in 2017-2018.

Fitch Solutions noted that easing expansion of household spending — otherwise a key GDP growth driver — and subdued exports tempered growth, adding that the trend for these two segments will likely persist at a time of rising interest rates globally and at home.

The research groups also assumed that there won’t be a “lasting resolution” to the tariff war between the United States and China despite a 90-day truce to make way for discussions.

“A re-escalation of trade tensions will not only disrupt global supply chains and investor confidence, but also weigh directly on China’s economic growth and hence export demand from the Philippines,” the report added.

Latest PSA data show China accounting for 12.971% of total Philippine merchandise exports in the nine months to November last year, ranking fourth behind the United States, which topped all with a 15.564% share, and Japan, which placed third with 14.002%. Hong Kong — a special administrative region of China — came second with a 14.166% share in the same nine months.

Still, the Fitch Group unit noted that risks to the Philippines have so far been “evenly balanced,” with increased government spending supported by ample dollar reserves and a low debt burden.

At the same time, the simmering Sino-US trade dispute may “damage economic cooperation” and see Chinese pull out investments in the Philippines.

Finance Secretary Carlos G. Dominguez III said on Wednesday that economic managers are keeping seven percent as their “fighting target” for 2019 GDP expansion, confident that the country’s economy remains fairly insulated from global shocks since it is driven primarily by domestic activity.

“For the year ahead, we expect household consumption to recover as inflationary pressures subside given a subdued outlook on international oil prices and the expected reduction in rice prices from the enactment of the rice tariffication law,” economic managers also noted in a joint statement, referring to a measure now just awaiting Mr. Duterte’s signature that is expected to slash retail prices of the staple by as much as P7 per kilogram and headline inflation by 0.7-0.8 percentage point when it replaces current import quota restrictions with a regular tariff scheme that will open up importation.

Market watchers this early in the year are divided on 2019 prospects, with some saying that growth will accelerate as inflation eases while others believe rising interest rates could dampen domestic activity. — Melissa Luz T. Lopez





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