Moody’s unit sees ‘strong’ GDP growth

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Much depends on a slowdown in inflation, which has been eating into households' pockets.

By Melissa Luz T. Lopez
Senior Reporter

SLOWER INFLATION would help ensure that the Philippines can maintain above-six percent economic growth in the coming years, Moody’s Analytics said, amid signs that price pressures are now finally easing.

The Philippines remains on track to be among the fastest-growing economies in the region even as growth “slowed noticeably” to 6.1% in the third quarter, coming from 6.2% in April-June and 6.6% logged in January-March.

The deceleration came on the back of a softer pickup in private consumption, which settled at 5.2% year-on-year coming from 5.9% the previous quarter as multiyear-high inflation ate into households’ pockets.

“Provided that overheating risks are contained, GDP (gross domestic product) is projected to grow at a strong 6-7% pace over the next few years,” the unit of Moody’s Corp. and sister firm of credit rater Moody’s Investors Service, said in a report published over the weekend.

Socioeconomic Planning Secretary Ernesto M. Pernia has said that the economy would have grown much faster had it not been for inflation, which averaged 6.2% in the July-September period.

In turn, this eroded household spending, which has long been the key driver of economic activity.

“Beyond the weaker peso, the acceleration in inflation has also been driven by higher food prices, which have been affected by adverse weather conditions. Higher oil prices have also played a role, as has an increase in excise taxes such as for tobacco and alcohol,” Moody’s analyst Vaesna Kong said.

“However, we expect price pressures to gradually ease in 2019, as food supply improves and the transitory impact of the tax increases fades. Rate hikes this year by Bangko Sentral ng Pilipinas (BSP) should also help to tame inflation.”

Inflation steadied at 6.7% in October from the previous month’s nine-year peak, although central bank officials have said that this confirmed observations that price increases are “finally moderating” — as shown in slowing month-on-month inflation — and should be on a downtrend in the coming months.

Inflation has averaged 5.1% so far this year, short of the BSP’s 5.3% full-year projection but already well above the original 2-4% target.

Next year, the central bank sees inflation to settle back to 3.5%.

The BSP has also raised policy rates by another 25 basis points (bp) last week, which it described as a “proactive” move to stem price pressures. Benchmark interest rates have now risen by a total of 175 bps since May to 4.25-5.25%.

Last quarter’s “relatively soft” GDP pace also came at a time of weak exports and a consistent double-digit increase in imports, Moody’s Analytics said.

This pushed the country’s current account to a wider deficit, which has also fueled negative sentiment towards the peso.

However, Moody’s Analytics draws confidence from a boost of dollar inflows as well as robust foreign direct investments, with the government-led infrastructure drive seen to support further growth.

“Notwithstanding this period of slower growth, which we expect to persist in the near term as imports remain strong and the combination of higher inflation, taxes and interest rates undermines consumer spending, we expect the Philippines to remain a standout growth performer in coming years,” it said.

“The economy still benefits from one of the youngest populations in the region, as well as steady inflows of overseas worker remittances and a strong business outsourcing processing industry.”

GDP growth averaged 6.3% in the first three quarters, still shy of the government’s tempered 6.5-6.9% goal for 2018. The economy needs to expand by seven percent this quarter to even hit 6.5%.