FMIC cuts GDP view to 6.0-6.5% after budget delay; sees H2 pickup

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FIRST Metro Investment Corp. (FMIC) reduced its 2019 growth forecast to about 6.0-6.5% from its earlier estimate of 6.8-7.2%, after the delay in passing the 2019 budget dampened spending, with the government’s catch-up program beginning to show a pickup in the second half of the year.

The earlier estimate was made in January along with FMIC’s forecasting partner, the University of Asia and the Pacific (UA&P). The new 6.0-6.5% estimate is within the national government’s target band of 6-7% growth for the year.

“After a slower-than-expected growth in the first quarter of the year, we expect the rest of 2019 to be better. Our economy will rebound and will be stronger, as we had forecasted earlier this year, driven by robust domestic demand and boosted by solid investment spending,” FMIC President Rabboni Francis B. Arjonillo said during the company’s Midyear Economic and Capital Markets Briefing 2019 on Monday.

“The catch-up plan of the government to bring infrastructure spending to 5.2% of GDP is very encouraging and would strongly support our growth expectation. Another positive sign is the rapidly decelerating inflation, which will provide the stimulus for consumer spending,” Mr. Arjonillo added.

According to Mr. Arjonillo, the tourism sector will also help drive growth, with arrivals of 2.87 million in the four months to April. The 2019 target is 8.2 million.


After posting growth of 5.6% in the first three months, the national government is hoping to ramp up spending, with disbursements targeted at P3.774 trillion, equivalent to 19.6% of gross domestic product (GDP).

Total infrastructure disbursements meanwhile are expected to hit P1 trillion, equivalent to 5.2% of GDP.

UA&P economics professor Victor A. Abola said, “I think the approval of the budget on April 15 opens the gates for the government to be able to catch up with its plans… I’m not afraid of the government not being able to catch up. I’m sure they can.”

“I’m confident because they have the money. They have pre-funded the basic needs. The money is there… The problem with the reenacted budget is you cannot start new projects but now we have our new budget approved, we have new projects then,” Mr. Abola said, noting that some projects such as the Metro Manila Subway are under construction.

“All the agencies are under pressure to catch up as well,” Mr. Abola said.

FMIC Chairman Francisco C. Sebastian meanwhile said that the company is seeing investors coming in, especially the Japanese, a good indicator of a ramping up of infrastructure spending.

“Even in our banking, we see people coming around looking for facilities, looking for partners. Japan is always here. The Japanese companies are here. We have interactions with them. We have a lot of people trying to do infrastructure projects. We all know they’re difficult to put together… I think in the next three years, we will see these projects coming,” Mr. Sebastian said.

Asked to comment on a Moody Analytics statement that implementing the catch-up plan is “challenging” for the government, alongside an S&P Global Ratings downgrade of its forecast for Philippine growth to 6.1% from 6.3%, Mr. Sebastian replied, “We should look at the big number around 6%. In fact we’re doing well despite the weather issue. We see a lot of preparatory work being done as we speak. We’re quite positive.”

FMIC is also expecting inflation to fall into a range of 2.7-3% in 2019, within the Bangko Sentral ng Pilipinas’ (BSP) forecast of 2-4%, driven by lower fuel and food costs.

“Oil prices are now… below the projected average for the year,” Mr. Abola said, noting that the implementation of the Rice Tariffication Law has also helped in driving food prices down.

The Philippines is also less likely to be affected by the trade war between China and the United States, and could even benefit from it, Mr. Abola said.

“The Philippines will probably benefit from the trade war. We have GSP (Generalized System of Preferences) privileges that are being maintained,” according to Mr. Abola.

Meanwhile, FMIC and UA&P economists said that further cuts in the reserve requirement and policy rates are expected before the end of 2019.

“We think the market will remain conducive for bond investment in the second half as we anticipate the BSP to further cut the reserve requirement by another 2% and potentially reduce policy rates by 50 basis points from its current levels as inflation continues to drop. These cuts should produce positive effects for the economy and the financial markets because there will be more funds available for consumers,” Mr. Arjonillo said.

Mr. Arjonillo noted that the Philippines is still one of the countries in the world with the high levels of bank reserve requirements.

“The reduction of the RRR (reserve requirement ratio) will also deepen the debt market, open up new borrowing channels and keep the country competitive relative to its Asian peers,” he said.

Mr. Abola concurred, saying, “I think that the BSP will cut (policy rates) further by 50 basis points before the end of the year and likely also make further reserve requirement cuts,” noting that these could cause the peso to slightly weaken.

The BSP has reduced policy rates by 25 bps and universal and commercial banks’ RRR by 200 bps.

Meanwhile, FMIC said that it is looking forward to the passage of the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) this year to clear up market uncertainty and boost foreign direct investment (FDI).

“Right now, the condition is there is less certainty. Once the issue is settled, then there’s clarity, then we can expect the FDI to come in,” FMIC Vice President Cristina S. Ulang said.

“Whatever version it is, what is important is to remove the uncertainty… It is only the transition period. There should be clarity. Nothing is bad. The important thing is to remove the uncertainty by expediting, passing it within this year,” Ms. Ulang added, noting that recent FDI has been “sluggish.”

FDI contracted by 15.14% year-on-year in the first quarter to $1.94 billion.

The TRABAHO bill is part of the government’s Comprehensive Tax Reform Package (CTRP). The Department of Finance (DoF) hopes to pass it into law and expects its signing to help raise the sovereign credit rating.

S&P upgraded the Philippines’ credit rating to BBB+ from BBB.

“Our move to the grade ‘A’ will happen during this term,” Mr. Arjonillo said. — Reicelene Joy N. Ignacio