By Melissa Luz T. Lopez
Senior Reporter
CAPITAL FORMATION will likely hit a snag this year amid higher interest rates and delays in infrastructure projects, which in turn will pull growth below the state’s 7-8% goal.
ING Bank N.V. Manila senior economist Nicholas Antonio T. Mapa said investments may decelerate due to delays in the enactment of the national budget, and as the impact of last year’s increases in benchmark interest rates feed into commercial borrowing costs.
“We’re seeing that election boost, but it doesn’t come necessarily from your consumption numbers — it comes from capital formation,” Mr. Mapa said during the ING Economic Briefing held yesterday at the Fairmont Makati hotel.
“Capital formation is indeed hampered by rate hikes by the BSP (Bangko Sentral ng Pilipinas) and delays in the budget. We’ve had six percent-plus growth for 15 quarters and if we see that coming slightly below that, maybe that’s a good sign that it’s time to ease on [monetary] policy.”
The bank economist said that higher borrowing rates have crept their way into the wider financial system, with signs that both consumer and corporate clients have begun to feel the pinch.
Investments have been taking a bigger share of overall economic growth, with its slice expected to grow to 31% in 2019 from just 24% in 2015. Economic activity remains largely consumption-driven, although its share has eased to about 66% this year from 69% four years ago.
Capital formation grew by 3.3% in 2018, which helped drive the full-year gross domestic product (GDP) growth to 6.2%.
Mr. Mapa said he expects a steady pace in 2019, contrary to some market bets that growth will receive a boost this year owing to the May 13 mid-term polls. Citing data, previous election years saw capital formation grow faster at 4.4% in 2010, 4.3% in 2013 and 4.9% in 2016.
“I don’t think you can have that kind of capital formation this year. One, the BSP hiked rates by 175 basis points (bp) — capital formation will take a hit. Second… you don’t have that public construction boom,” Mr. Mapa said, referring to the delayed enactment of the 2019 budget.
“We’ll still get a decent number — maybe 3.3% — but it’s not gonna be enough to bring you back to close to 7% growth just because it’s an election year.”
ING sees 2019 growth at 6.3%, which if realized will slightly pick up from last year’s pace but will miss the 7-8% target set by the Duterte administration.
He added that the delayed enactment of the national budget — which cleared Congress just last Friday – will “definitely hit” investment growth.
The national government is currently operating under a re-enacted budget, since the proposed P3.757-trillion spending plan yet to be signed by President Rodrigo R. Duterte, hence, leaving new programs and projects unfunded.
Mr. Mapa clarified that his forecasts assume that the government will have to pause all public works during the 45-day ban ahead of elections.
Economic managers have said that they will ask the Commission on Elections to exempt priority construction projects from the ban.
Mr. Mapa is projecting a slow start for the Philippine economy, with GDP growth expected to ease to 5.8% this quarter, pick up to 6.1% in the second quarter, then 6.3% in the third quarter and at 6.4% for October-December.
The bank expects tempered GDP growth to result in a 25bp rate cut in May, followed by another reduction next semester. The reserve requirement ratio is also expected to be slashed by 200bp this year, Mr. Mapa added.

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