By Christine Joyce S. Castañeda
Senior Researcher

THE PHILIPPINE ECONOMY expanded last quarter at a pace slightly slower than expected even as full-year growth fell within the government’s target and cemented the country’s place among Asia’s fastest-growing economies, the Philippine Statistics Authority (PSA) reported yesterday.

Gross domestic product (GDP) — the total amount of final goods and services produced within the country — grew 6.6% in the three months to December, matching the year-ago pace though slower than the third quarter’s upwardly revised 7.0%.

The fourth quarter brought full-year growth to 6.7%, near the low end of the government’s 6.5%-7.5% target range for 2017 but slower than 2016’s 6.9%. The full-year rate was at par with the median estimate in a BusinessWorld poll of economists even though its fourth quarter median estimate of 6.7% was slightly off.

Gross national income, which is the sum of the nation’s GDP and net income from overseas — registered a 6.2% growth rate last quarter from 6.0% in 2016’s final three months.

The fourth quarter, Socioeconomic Planning Secretary Ernesto M. Pernia said in a news briefing yesterday, provided a “strong finish” that keeps the country among the fastest-growing economies in Asia after China’s 6.9% and Vietnam’s 6.8%.

Services — the economy’s mainstay that accounted for about 56% of GDP last quarter — grew 6.8% from the 7.2% logged in 2016’s last three months.

Industry continued to be a strong performer, growing by 7.3% in the fourth quarter albeit slower than the 7.9% recorded in 2016’s corresponding three months. Buoying growth in the sector was growth of manufacturing (8.8% from 7.0%) and mining and quarrying (8.8% from 10.8%).

Construction grew 2.8% last quarter from 10.7% in the same period in 2016. Mr. Pernia noted the “stronger public construction spending” in that period, as reflected by 25.1% growth, offsetting the 2.9% contraction seen in private construction. “This keeps the overall construction growth in positive territory, which is a boost in line with our Build, Build, Build program,” he said.

Agriculture expanded by 2.4%, a turnaround from the year-ago 1.3% contraction.

On the expenditure side, fuelling economic expansion was government spending, growth of which accelerated to 14.3% in the fourth quarter from 8.3% in the third quarter and 4.5% a year ago.

“This is very much in line with the government’s commitment to timely delivery of public services and social protection programs, including assistance to victims of typhoons as well as in the Marawi conflict, public scholarship programs and health expenditure programs,” said Mr. Pernia, who heads the National Economic and Development Authority (NEDA) as director-general.

Exports grew at a faster pace of 18.6% in the fourth quarter of last year from the 13.4% a year earlier. Imports grew as well by 17.5% from 15.4%.

“[E]xternal demand improved with growth in exports of goods bouncing back to 20.2% in the fourth quarter from 17.2% in [the third quarter]. This offset the service exports sector’s slowdown of 12.6% from 19.9% in the previous quarter,” Mr. Pernia said.

Mr. Pernia noted that major contributor in the decline of service exports were “miscellaneous” services, a category that includes business processing outsourcing (BPO). “We can take this as an indication that the current market profile of the BPO sector is ripe to move into higher value added services,” he said.

Household consumption, which made up at least 70% of fourth-quarter GDP, remained robust, growing 6.1% in the fourth quarter albeit slower than the 6.2% in the fourth quarter of 2016.

For Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines (Landbank), the slower growth seen last year was due to “the absence of boost from election spending, which was the primary driver for 2016’s strong growth print.”

“As a result of election-related expenditures, consumption spending consistently increased more [than] 6.0% for all quarters of 2016, recording an average of 7.0%. The same support was not available last year. Because of this, growth in consumption expenditure last year was still firm, but at a slower average rate of about 5.8%,” he pointed out.

For Mr. Pernia, “this is a good performance, given the fact that it is already normal for post-election years to witness a decline in economic growth.”

Private investments through capital formation, meanwhile, slowed to 8.2% last quarter from 14.7% in 2016’s final three months.

OUTLOOK
For Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr., the GDP growth rates of the fourth quarter and of full-year 2017 “confirm the underlying strength of the economy that rests on increasingly balanced foundation.”

“This gives BSP ample policy space to stay focused on meeting its inflation target and pursuing ambition financial sector reforms,” Mr. Espenilla said in a mobile phone message to reporters.

The BSP, which has kept monetary policy steady since rate increases in September 2014, will have its first of eight scheduled policy reviews this year on Feb. 8.

In a statement, Finance Secretary Carlos G. Dominguez III said GDP should grow even faster this year on the back of even bigger spending — especially on infrastructure — financed partly by a comprehensive overhaul of the country’s tax system that began with Republic Act No 109623, or the Tax Reform for Acceleration and Inclusion Act (TRAIN) enacted last Dec. 19 and which took effect this month, new Official Development Assistance funds and some $750 million raised last week from the sale of 10-year dollar-denominated bonds.

“These developments, which attest to President [Rodrigo R.] Duterte’s unwavering political resolve to effect real positive change and the corollary strong investor confidence in the domestic economy on his watch, would guarantee enough fiscal space to let government continue pursuing an expansion policy leading to nonstop high — and inclusive — growth,” Mr. Dominguez said in his statement.

NEDA’s Mr. Pernia said that “[i]n the next quarter, we see the domestic demand picking up as household consumption will likely improve, following the recently approved tax reform package, which will result in higher take home pay for 99% of Filipino taxpayers.”

“Household consumption is also seen to benefit from expanded employment opportunities from the ‘Build, Build, Build’ program,” referring to an P8-trillion infrastructure development program until 2022, when Mr. Duterte ends his six-year term.

Analysts were for the most part upbeat on their outlook for 2018, with their optimism hinged on the government’s rollout of infrastructure projects.

Rajiv Biswas, Asia-Pacific chief economist at IHS Markit, expects the Philippine economy to grow 6.5% this year as it “continues to fire on all cylinders.” This is in contrast to the government’s growth target band of 7-8% for 2018.

“With the global growth outlook having started 2018 on a very positive note, this is expected to boost export growth momentum for the Philippines for both goods and services, as well as creating a favorable environment for overseas worker remittances to strengthen,” Mr. Biswas said.

“Meanwhile domestic demand will also remain strong in 2018, with consumer expenditure expected to remain buoyant, while investment will be boosted by the government’s plans to ramp up infrastructure spending.”

At the same time, he said, “with strong economic growth momentum continuing, the BSP is likely to become more hawkish, as inflation pressures rise in the near term due to higher world oil prices and higher indirect taxes implemented as part of the TRAIN tax reform measures.”

Sanjay Mathur, ANZ Research chief economist for Southeast Asia and India, shared this assessment, saying: “The prospects for growth in the Philippines remain solid with the tax reform-induced infrastructure spending plan of the government set to reinforce the already strong domestic demand conditions,” even as he expressed concern about “rising imbalances” from a widening trade deficit and strong credit growth.

Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines (UnionBank), was likewise positive: “I see 2018 GDP (growth) up to 7.0% and all quarters leading to such.”

“There are 15 major infrastructure projects that are planned to be broken ground this year. If all will push through and happen, I see no reason why the Philippines would not be hovering above 7.0% growth even beyond 2018.”

For Landbank’s Mr. Dumalagan, growth in the next quarters will depend largely on the implementation of the TRAIN and the “Build, Build, Build” program.

“A successful rollout of such plans could sustain the country’s growth momentum,” Mr. Dumalagan said.

“However, delays could result in an economic slowdown and perhaps a reversal of the inflows that arrived in the Philippines last December,” he said.

In a note, Nomura Research said: “For 2018, we continue to forecast an increase in growth to 6.9%, driven in part by the impact from tax reforms, which are helping to fund public infrastructure projects while also boosting real household disposable incomes.”

On the other hand, Capital Economics Asia economists Alex Holmes and Krystal Tan said in a research note that growth “is likely to slow further” to 6.0% in 2018, citing slowdown in exports and private investment.

“Despite a decent outlook for global growth, we don’t think that export volumes can expand at close to 20% year-on-year for much longer. At the same time, import growth is set to remain well within the double figures, fuelled by demand for capital goods to supply the boom in infrastructure spending. As a result, net trade is likely to act as a bigger drag on growth,” the Capital Economics note read.

The London-based consulting firm added that growth of private investment is likely to slow, noting that latest growth data “show investment growing at its weakest pace in three years” as well as Mr. Duterte’s “erratic policymaking style” that could weigh on investor sentiment.