Fitch Solutions raises 2020 growth forecast to 6.3%

FITCH Solutions Macro Research has upwardly revised its 2020 gross domestic product (GDP) growth forecast for the Philippines, citing combined fiscal and monetary stimulus paired with better external demand and base effects which could help the country rebound from the less than six percent growth seen in 2019.

The research firm added that another a major headwind is the weakness in capital formation, with foreign direct investments (FDI) possibly continuing their slump this year.

In a note sent to reporters on Friday, Fitch Solutions said it has upgraded its growth forecast for the country for this year to 6.3% from its previous outlook of 6.1%.

“Looking ahead, we expect base effects, the combined stimulus of ramped-up fiscal expenditure and looser monetary conditions, as well as a modest improvement in the external demand, to contribute to a stronger 2020 real GDP growth print,” Fitch Solutions said.

The firm noted that the 5.9% print in 2019 came after the downwardly revised 6% third quarter growth from the initial 6.2% reading as “activity proved less robust” than what they had expected.

Despite this, Fitch Solutions said the 6.4% GDP growth logged in the fourth quarter of 2019, which was the fastest since the downwardly revised 6.6% print in the first quarter of 2018, is an indication that stimulus from the government and the central bank is already starting to take its desired effect in the economy.

According to their report, the base effects will support economic growth in the first half of 2020, given that growth in the first and second quarters of 2019 were at subdued prints of 5.6% and 5.5%, respectively.

It added that the negative effects of the delayed budget passage in 2019, which has hampered public investment plans and failed to support the economy resulting to soft external demand conditions, have dissipated.

Fitch Solutions also said the timely passage of the 2020 budget and the remaining untapped funds from the 2019 budget which will will also be utilized this year will ensure “fiscal stimulus will be a major driver of the economy.”

In terms of monetary policy, the firm said they expect an “insurance cut” from the Bangko Sentral ng Pilipinas (BSP) early this year, with a reserve requirement ratio (RRR) cut is possible as well. This, according to Fitch Solutions, should support credit supply, which slumped through 2019.

“We think easing will come possibly as early as February, given inflation remains within the lower bound of the BSP’s target range and credit growth has yet to return to the levels seen before the 2018 hiking cycle,” Michael Langham, Senior Country Risk Analyst of Fitch Solutions, said in an email to BusinessWorld.

The BSP cut key policy rates by 75 basis points (bp) in 2019 following rate hikes worth 175 bps in 2018. This brought down rates to 3.5% for the overnight deposit facility, four percent for overnight reverse repurchase and 4.5% for overnight lending.

“Weak foreign direct investment inflows may encourage the BSP to ease borrowing conditions to help stimulate domestic investment,” Mr. Langham added.

Fitch Solutions said a downside risk to their outlook is weak gross fixed capital formation.

“Despite an ongoing relocation of manufacturing from China as part of the trade tensions with US, the Philippines has failed to attract the investment that some its regional peers have been able to achieve,” the report said.

“The BSP will however be wary of rising inflationary pressures resulting from food and oil prices, and thus we foresee only one rate cut in 2020,” it added.

Foreign direct investments in October increased by 33.7% to $672 million from $572 million a year ago. However, FDI in the 10 months to October was down by more than a third (32.8%) to $5.79 billion from the $8.611 billion seen in the comparable period in 2018.

The firm attributed the slowdown in FDI to the “ongoing uncertainty surrounding government contracts” and to the yet to be passed tax reform plan.

The report was referring to President Rodrigo R. Duterte’s direction to renegotiate concessions with some water firms, with other public contracts also under scrutiny.

Presidential Spokesperson Salvador S. Panelo earlier said the President has already okayed the review of Ayala Land, Inc.’s contract with the University of the Philippines-Diliman to develop the site which became UP Ayala Land Technohub.

The deal is the second among the contracts of the Ayala Group which are under review for what the government said are “onerous” provisions, including the water contract of the Ayala-controlled Manila Water Co., Inc.

“While our infrastructure team expects improvements to the public-private partnerships (PPPs) framework over the coming years, the uncertainty may sap FDI in the near term,” Fitch Solutions said.

Meanwhile, the Corporate Income Tax Incentives Rationalization Act is still pending in the Senate since October.

The bill, which was already approved in the House of Representatives on September, mandates the decrease of corporate income tax from the current 30% to 20% gradually as it is one of the biggest rates among major Asian economies.

“Until clarity is given over tax policy adjustments, FDI and domestic private investment could stall,” Fitch Solutions said. — Luz Wendy T. Noble