S&P sees above 7% GDP growth for PHL

THE PHILIPPINE ECONOMY is expected to grow above 7% in the next few years, but is still grappling with pandemic scars as seen in the lost output gap in the gross domestic product (GDP), S&P Global Ratings said on Wednesday.

“As of the latest GDP reading, at the end of the fourth quarter 2021, we still estimate that the Philippine GDP level is 14% below where it would have been without the pandemic,” Vincent Conti, S&P senior economist, said at an online webinar.    

The Philippine economy rose by 5.6% in 2021, a reversal of the record 9.6% contraction in 2020.

For 2022, S&P expects Philippine GDP to expand by 7.4% which is within the 7-9% target by economic managers.

“We do expect growth, the rate of GDP growth to recover quite strongly over the next few years, staying above 7%. And we do also expect unemployment to ease down gradually from the peak that we saw during the pandemic,” Mr. Conti said.

Still, Mr. Conti noted how the Philippine economy continues to reflect economic scarring or some signs of long-term impact due to the crisis.

“However, we do also recognize that some of this scarring might be permanent in the sense that the level of GDP might never catch up to the half that it was taking without the pandemic. But that is not to say that the important parts of of the economic assessment cannot recover,” he said.

Mr. Conti last year warned that by 2025, the Philippine GDP will likely be 12% below where it would have been without the pandemic.

At the same time, Moody’s Analytics raised its growth forecast for the Philippines to 6.2% this year, after seeing the strong rebound in the fourth quarter as restrictions were loosened and business activity picked up.

“The 6.2% growth largely reflects the strong fourth quarter of 2021, which puts the 2022 forecast for GDP at a higher level,” Moody’s Analytics Chief APAC Economist Steve Cochrane said in an e-mail.

The projection is higher than the 5.6% GDP growth projection given in January.

Moody’s Analytics had cut its projection last month after it took into account the slowdown in economic activity due to the Omicron-driven surge in coronavirus disease 2019 (COVID-19) cases. 

Philippine GDP grew by 7.7% in the fourth quarter of 2021, a reversal of the 8.3% contraction in the same quarter in 2020. This was also higher than the revised 6.9% GDP expansion seen in the third quarter of 2021.

Moody’s Analytics’ 2023 growth projection was cut to 5.4% from the 5.7% given in January. “On a quarter-to-quarter basis, the 2023 projections are little changed, but the annual figure is shifted a bit as it is coming off of the revised 2022 forecast,” Mr. Cochrane said.

BANKS ON TRACK FOR RECOVERY
Meanwhile, the Philippine banking industry is on track for recovery, as loan quality improves alongside the economic rebound, S&P said. However, the debt watcher said risks remain due to its significant exposure to the property sector and the emerging variants of COVID-19.

In its Philippine banking industry country risk assessment (BICRA), the economic risk trend was upgraded to “stable,” S&P Global Ratings Associate Director Nikita Anand said. This was changed from “negative” which was given in the third quarter of 2020.

“The reason for a stable trend is because we believe that Philippine banks are on a recovery path supported by improving macroeconomic conditions, our concerns on asset quality have reduced significantly,” Ms. Anand said at a webinar on Wednesday.

The country’s BICRA standing is at 5, on a scale of 1-10 with 1 being the best. In the region, Singapore and Hong Kong were assessed as having the strongest banking sector landing a grade of 2. Malaysia ranked higher than the Philippines with a grade of 4, while Thailand and Indonesia were assessed with a score of 6.

Ms. Anand said the expected launch of more digital banks this year could trigger other banks to raise their deposit rates. New digital banks typically offer about 5-6% rates to attract funds. Only the Overseas Filipino Bank and the Tonik Digital Bank, Inc. (Philippines) have started operations.

The other four lenders that were granted licenses by the central bank are Union Digital Bank, UNO Bank, Maya Bank, and GOtyme.

“So if there is a possibility for deposit price competition, there’s a huge market out there to capture. The Philippines is a very under-penetrated market in that sense, especially when it comes to retail loans or small-ticket loans,” Ms. Anand said.

RISKS FROM PROPERTY
Philippine banks may face risks arising from their exposure to commercial properties, Ms. Anand said.

“There is uncertainty on the long-term prospects of this sector with the increasing preference for working from home and increasing preference for shopping from home and e-commerce,” she said.

Potential policy rate hikes could improve margins, although Ms. Anand said the BSP is not expected to start increasing interest rates in the near term.

Philippine banks will also likely improve profitability this year with the reopening of the economy.

“We are expecting higher credit growth and growth in fee income as business activity picks up as well as the lower credit costs to improve sector profitability,” she said.

The World Bank on Tuesday warned of the risk of rising loan defaults when relief measures are scaled back.

At a briefing on Wednesday, Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno downplayed such risks in the case of the Philippines.

“I think the World Bank is referring to emerging economies in general. I think the Philippines does not belong to that group. I think we have prepared our banks and MSMEs (micro, small, and medium enterprises), we have helped them during this crisis. So I don’t see them under threat at the moment,” Mr. Diokno said.

Support measures introduced during the pandemic, included loan moratoria and relaxed accounting standards for recognizing distressed loans, have already lapsed. Ms. Anand noted that very few lenders have applied for the accounting relief measures and were mostly rural and cooperative banks.

In 2021, central bank data showed the local banking industry’s combined net income reached P223.66 billion, up 44% from the P155.22 billion seen in 2020.

The bad loan ratio declined to an 11-month low of 3.99% as of end-December, reflecting improving asset quality. It reached a 13-year high of 4.51% in July and August 2021. — Luz Wendy T. Noble and Jenina P. Ibañez