THE PHILIPPINE ECONOMY can expect to benefit from revived infrastructure spending in the latter half of this year after a four-month delay in enactment of the P3.662-trillion national budget weighed on “fiscal impulse” this semester, S&P Global Ratings said in a report e-mailed to journalists on Tuesday that tagged the impact of Sino-US trade tensions and potential price pressures from a prolonged El Niño episode and oil prices as key risks to the country’s growth prospects.
HSBC Private Banking said separately on Tuesday that the second half should see infrastructure spending pick up, but still kept its earlier projection that overall economic growth will slow this year from 2018.
ASSESSING FINANCIAL RISKS
Tuesday also saw the Bangko Sentral ng Pilipinas (BSP) announcing that the interagency Financial Stability Coordination Council (FSCC) has held its second quarter meeting to assess the impact on the Philippines of a possible global growth slowdown.
BSP Governor Benjamin E. Diokno, who chairs FSCC that has as members the Department of Finance, the Securities and Exchange Commission, Insurance Commission and the Philippine Deposit Insurance Corp., said in a statement that the financial market has remained on generally solid footing this quarter after an assessment of credit, liquidity and investment risks as well as availability of long-term funds for the government’s “Build, Build, Build” infrastructure development program.
“We worked against the backdrop of an anticipated global growth moderation. We agreed on a number of possible interventions, from shorter term initiatives to our longer term goals. This leaves us with a road map geared towards sustaining market resiliency,” Mr. Diokno said.
KEY GROWTH DRIVER
In the May issue of its Asia-Pacific Monthly Snapshots report, titled: Investment Is a Trade War Casualty, S&P said it expects Philippine gross domestic product (GDP) growth to edge up from a three-year-low 6.2% in 2018 to 6.3% this year — retained from its April estimate but down from 6.4% in January and 6.6% in November last year — as well as 6.5%, 6.6% and 6.7% in the succeeding three years, also retained from projections given last month.
“Despite the weaker-than-expected Q1 [GDP growth of 5.6%, which was the weakest in four years], we continue to expect GDP growth to come in at the low end of the 6-6.5% range this year,” the report read, noting that “[t]he fiscal impulse is definitely lower in the first half of 2019, but we expect infrastructure spending to ramp up again in the second half, making the overall impulse about neutral for 2019.”
In its second quarter investment briefing on Tuesday, HSBC Private Banking Chief Market Strategist in Asia Fan Cheuk Wan said the bank projects GDP to grow six percent this year, keeping the forecast it gave in January, citing the impact of delayed budget enactment and the 45-day public works ban ahead of the May 13 midterm elections.
“I think this mainly reflects the ban on public works, so that is the tempering hiccup in terms of infrastructure spending growth,” Ms. Fan told reporters yesterday.
“We [kept] our overall forecast for GDP growth at six percent after we took into account the slowdown in government spending on infrastructure in the first half…”
At the same time, she added, “the pickup of acceleration in infra[structure] spending in the second half [should provide some lift],” while “resilient consumer spending, post-election government spending and recovery in remittance would be key growth drivers to support Philippine economic performance improvement in the second half the year.”
The Bureau of the Treasury reported on May 24 that overall state spending dropped 3.2% year-on-year to P999.8 billion as of April due to the delayed national budget enactment that “constrained the government from implementing new programs and projects”, with expenditures “other” than interest payments — a category that includes infrastructure and other capital outlays — falling 9.1% to P131.3 billion in the same four months.
Expecting muted first-quarter economic expansion, state budget planners slashed their 2019 GDP growth target to 6-7% from 7-8% originally. Also partly weighing on overall economic growth was farm output that edged up just 0.67% annually compared to a downward-revised year-ago 1.08% increment and 1.8% in 2018’s final three months, as well as a 2.5-3.5% program under the 2017-2022 Philippine Development Plan, partly due to a dry spell brought about by El Niño that is now expected to last till August.
The government of President Rodrigo R. Duterte targeted overall economic growth to average 7-8% in his six-year term ending mid-2022 from 6.3% in 2010-2016 in order to make a significant dent on poverty. GDP growth in his first two years in office averaged 6.45%.
CATCHING UP
The National Economic and Development Authority (NEDA) also reported on May 24 that the Cabinet’s economic development cluster (EDC) had mapped out a spending catch-up strategy for the rest of the year. “A catch-up plan is imperative. The EDC estimates that the government underspent by close to P100 billion during the first five months of the year due to the delayed passage of the 2019 budget. That is around P750 million to P1 billion a day,” a NEDA statement then quoted its director-general, Socioeconomic Planning Secretary Ernesto M. Pernia, as saying. “To reach our full-year growth target of 6-7”, the economy will need to expand by an average of 6.1% over the next three quarters. This target is still within reach, should the private sector sustain its current performance and government be able to speed up the implementation of its ongoing programs and projects, and jump-start new ones.”
The Department of Budget and Management noted that state disbursement totaled some P778 billion last quarter, and that in order to hit the full-year disbursement program of P3.774 trillion, government must spend P2.996 trillion in the second to fourth quarters. Actual infrastructure disbursements totaled P207.2 billion in the first quarter. To reach the infrastructure-spending target of P1 trillion, government must spend P792.97 billion on infrastructure in the second to fourth quarters. The Department of Public Works and Highways and the Department of Transportation made a combined spending commitment of P803.1 billion for the remaining three quarters of the year.
OUTLOOK
The current administration targeted to reduce poverty incidence to 17.3-19.3% in 2018 — it was 21% in the first half of last year — from 21.6% in 2015. The rate is targeted to go down further to 14% when Mr. Duterte ends his six-year term in 2022.
S&P projects Philippine unemployment rate to decline from 2018’s 5.3% to 5.2% this year, to 4.9% next year, four percent in 2021 and to 3.8% in 2022, roughly in tune with the government’s target to bring the rate down to 4-5% by the time Mr. Duterte steps down as scheduled.
The global debt watcher also expects inflation to clock in at 3.6% this year (against the central bank’s downward revised 2.9% forecast), 3.5% next year (compared to the central bank’s upward revised 3.1%), as well as 3.2% in 2021 and 3.8% in 2022 from the actual decade-high 5.2% in 2018.
“Falling inflation allows BSP to cut [policy interest rates] further — at least once more this year — while spurring consumption growth as well,” S&P said in its report.
The Bangko Sentral ng Pilipinas (BSP) on May 9 partially dialed back its cumulative 175 basis point (bp) hike last year, cutting policy interest rates by 25 bp to 4.5% for the overnight reverse repurchase (RRP) rate, to four percent for overnight deposit and to five percent for overnight lending.
S&P now expects the RRP rate to slide further to 4.25% by yearend which will be retained throughout 2020, before it is cut further to 3.5% by end-2021 which will be maintained the following year.
HSBC’s Ms. Fan shares the expectation of “another 25 bp cut in policy rate cut in the fourth quarter” and “room for further reserve requirement ratio (RRR) reduction of 100 bp before the end of the year” after the BSP fired off in the last two weeks phased 200 bp RRR cuts to 16% for big banks and to six percent for thrift banks, as well as a one-time 100 bp cut to four percent for rural and cooperative banks.
“Risks to external financing and exchange rate volatility are back on the radar screen as the (US-China) trade war re-escalates,” the debt rater said.
“The spillovers of the trade war to the Philippine electronics sector [which contributes about half of total merchandise exports and which slipped by 1.7% to $8.841 billion last quarter] could also be larger than we anticipate at least in the short run,” it added.
“Domestically, a resurgence in inflation from El Niño or oil prices remains possible and could weigh on consumption recovery and the ability of BSP to ease (monetary policy) at a time when the fiscal impulse is already negative in the first half of the year.” — with KANV
