By Keisha B. Ta-asan, Reporter

THE PHILIPPINE economy is likely to expand by 5.8% this year, although elevated inflation and higher borrowing costs may dampen growth, S&P Global Ratings said. 

“The momentum of domestic demand has stayed stronger for longer than we had expected, causing us to raise our 2023 forecast to 5.8%,” S&P Senior Economist Vincent Conti said in an e-mail. 

The debt watcher’s latest Philippine gross domestic product (GDP) growth estimate is faster than the 5.2% forecast it gave in November.

However, it’s slower than the government’s 6-7% growth target this year.

In a note on Monday, S&P said Philippine growth held up better last year as it benefited from the impact of the economic reopening. 

The Philippine economy expanded by 7.6% in 2022, surpassing the government’s 6.5-7.5% growth target last year. It also marked the highest economic growth since 1976.

“However, we expect a number of factors to weigh on growth later this year, and also in 2024. First, we think that pent-up demand from the pandemic will lose some momentum later in the year, especially with inflation eating into disposable incomes,” Mr. Conti said. 

Inflation slowed to 8.6% in February from a 14-year high of 8.7% in January, bringing the two-month average to 8.6%.

The Bangko Sentral ng Pilipinas (BSP) expects inflation to return to the 2-4% target range by the fourth quarter.

According to Mr. Conti, the BSP’s aggressive tightening will negatively impact the economy this year. Weak GDP growth in advanced economies will likely affect external demand as well.

The Monetary Board last week raised its benchmark rate by 25 bps to 6.25%, the highest key rate in nearly 16 years or since the 7.5% in May 2007. The BSP has increased rates by 425 bps since May 2022 to tame inflation.

“Food and fuel prices have kept overall inflation higher for longer, and has begun to flow on to other prices. This will pull up the average headline inflation for 2023 as a whole,” Mr. Conti said.

The credit watcher expects Philippine inflation to average 6.2% this year and 3.2% in 2024, still above the BSP’s 2-4% target. Both projections are a tad higher from the BSP’s inflation forecasts of 6% for 2023 and 2.9% for 2024.

The Philippine central bank may also deliver more rate increases this year because of elevated core inflation, S&P said in its note.

Core inflation, which excludes food and fuel volatile prices, grew to 7.8% in February from 7.4% in January, marking the fastest core inflation print in over 22 years or since 8.2% in December 2000.

“As such, we expect BSP to hike to 6.5% and hold there for the rest of the year, until a more sustainable downtrend in inflation can be observed,” Mr. Conti said. 

BSP Governor Felipe M. Medalla earlier said that inflation may ease towards the 2-4% target by October this year.

The Monetary Board is scheduled to meet on May 18 to discuss policy.