Below-target growth likely this year

THE PHILIPPINES’ gross domestic product (GDP) growth will likely settle below the 6-7% target range this year, analysts said.

“The economy is in need of further support. Looking forward, fiscal tightening and weak export demand should keep growth subdued,” Capital Economics said in a report.

Capital Economics expects GDP growth to average 5.1% this year, well below the government’s 6-7% target.

For its part, Nomura Global Markets Research said it forecasts GDP growth to average 5.6% this year.

“We maintain our forecast for GDP growth to improve only marginally to 5.6% year on year in 2024 from 5.5% last year, before picking up to 6.1% in 2025,” it said in a report by Nomura research analysts Euben Paracuelles and Nabila Amani.

The Philippine economy grew by 6% in the first half. In order to meet the lower end of the target, GDP expansion should average 6% for the remainder of the year.

Third-quarter economic data will be released on Nov. 7.

Nomura noted that second-quarter growth was “disappointing and showed weakening growth momentum, led by another sequential contraction in private consumption.”

In the second quarter, GDP expanded by 6.3%, faster than 5.8% a quarter earlier and 4.3% a year ago. However, household final consumption rose by 4.6%, slowing from 5.5% in the previous year.

“Public investment spending remains the main engine, as the government makes progress on infrastructure projects. The midterm elections in May 2025 will also likely provide an additional impetus into next year,” Nomura said.

Meanwhile, inflation is seen to remain well within the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target band this year.

“Inflationary pressures are weak… our forecast is that a combination of weak economic growth and falling food price inflation will keep inflation low,” Capital Economics said.

Nomura expects headline inflation to average 3.1% this year, below the central bank’s 3.4% full-year forecast.

“Our forecast assumes headline inflation remains low at around 1.9% in the fourth quarter, partly reflecting the impact of the rice import tariff cuts,” it added.

Headline inflation sharply eased to an over four-year low of 1.9% in September from 3.3% in August. In the first nine months, inflation averaged 3.4%.

“After BSP’s 25-bp (basis point) cut to 6.25% in mid-August, the further decline in inflation reinforces our view that BSP will continue to cut rates,” it added.

The Monetary Board is expected to cut policy rates by 25 bps this week (Oct. 16).

“We expect another 25-bp cut in its scheduled meeting (on) Wednesday,” Capital Economics said.

“We reiterate our forecast for BSP to cut by 25 bps at each of the last two meetings of the year (i.e., in October and December),” Nomura said.

This is in line with a BusinessWorld poll conducted last week, which showed that 16 out of 19 analysts expect the BSP to reduce the target reverse repurchase (RRP) rate by 25 bps.

If realized, this would bring the target RRP rate to 6% from the current 6.25%.

“Looking beyond Wednesday’s meeting, we expect further cuts over the remainder of this year and in 2025. Our forecast that rates will finish next year at 4.75% makes us more dovish than the consensus,” Capital Economics said.

MORE CUTS IN 2025
Meanwhile, Nomura expects the Monetary Board to cut by 25 bps at each of its first three meetings next year before pausing.

“This would bring the RRP rate to 5% by May 2025 (i.e., a total of 150 bps in cuts in this cycle). The ongoing Fed cutting cycle also supports easing by BSP, but we still think BSP is unlikely to be more aggressive with 50-bp clips,” it said.

“The substantial RRR (reserve requirement ratio) cut is already providing additional easing and Governor Remolona said he prefers 25-bp cuts to the policy rate,” it added.

The BSP will reduce the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5%, effective on Oct. 25.

BSP Governor Eli M. Remolona, Jr. earlier said they are looking to bring the reserve requirement to as low as 0% by the end of his term.

Meanwhile, Nomura said the government will also struggle to meet its fiscal targets.

“We continue to forecast a fiscal deficit of 5.9% of GDP in 2024, above the revised medium-term fiscal framework (MTFF) target of 5.6%.”

“We think these MTFF targets will be challenging to meet due to spending priorities, such as the flagship infrastructure projects,” it added.

In the first eight months of the year, the budget deficit narrowed by 4.86% to P697 billion.

This year’s budget deficit ceiling is set at 5.6% of GDP. The government aims to reduce the deficit-to-GDP ratio to 3.7% by 2028.

“Expenditure disbursements tend to speed up towards yearend and revenue growth likely slows, in line with more modest GDP growth,” Nomura said.

“The passage of the bill implementing a VAT (value-added tax) on imported digital services is encouraging but will have a small revenue impact of 0.1% of GDP next year. We think political risks could rise in the run-up to the midterms and prove a distraction to enacting larger fiscal reform measures.” — Luisa Maria Jacinta C. Jocson