BMI cuts PHL growth forecast

FITCH SOLUTIONS’ unit BMI lowered its gross domestic product (GDP) growth forecast for the Philippines this year as weak external demand remains a drag.

In a report, BMI said it now expects the country’s GDP to grow by 5.8% this year, lower than its earlier projection of 6%.

This would fall short of the government’s 6-7% full-year forecast.

“The economy must expand by 6.3% in the final quarter just to hit our original forecast. But we think that it is a tad too optimistic,” it added.

The Philippine economy slowed to 5.2% in the third quarter from 6.4% in the second quarter, the weakest growth in five quarters.

For the first nine months, GDP growth averaged 5.8%. To hit the low end of the government’s full-year target, GDP must expand by at least 6.5% in the fourth quarter.

BMI said the Philippine economy is “not as weak as the numbers suggest,” and that “an acceleration is on the cards.

However, BMI flagged the weakness in external demand, which is seen to remain a “main drag.”

In the third quarter, exports of goods and services contracted by 1%, a reversal from the 2.5% expansion a year ago.

BMI said that the external sector is the “largest pain-point for the economy.”

“And we think that it will offer little relief over the coming quarters. With several of its major trading partners facing domestic economic headwinds of their own, a meaningful turnaround seems increasingly unlikely,” it said.

The services sector is also seen to undergo weakness, BMI said, noting that the Philippines is a “significant player” in the business process outsourcing industry.

The industry accounts for 15% of the global market share and 7.5% of the Philippine economy, BMI estimates showed.

“The country is particularly susceptible to fluctuations in the macroeconomic environment. Our team thinks that global growth will stagnate at 2.5% next year which will limit the performance in services exports,” it added.

On the other hand, BMI said that domestic demand will remain resilient and continue to prop up growth.

“That said, the pickup in domestic activity should more than make up for any weakness in external demand.”

It noted that household spending will continue to be robust amid easing inflation.

“A renewed acceleration in private consumption will also be sustained. For one, inflation retreated from a recent peak of 4.4% in July to 2.3% in October which will support real household incomes.”

Household consumption grew by 5.1% year on year in the third quarter from 4.7% in the second quarter. It accounts for over 70% of the economy.

“Given that around a quarter of Philippine imports are for consumer goods, we can use import volumes as proxy for household spending. Indeed, the recent surge in import volumes coincides with the uptick in private consumption and suggests that its recovery could be well underway,” BMI added.

Imports of goods and services rose by 6.4% in the third quarter, a turnaround from the 1.6% decline a year ago.

BMI said that further monetary loosening will also spur investment growth. It expects the central bank to deliver up to 200 basis points (bps) worth of cuts in its current easing cycle.

The Bangko Sentral ng Pilipinas has so far reduced borrowing costs by 50 bps this year, bringing the key rate to 6%.

TRUMP PRESIDENCY
However, BMI flagged downside risks to this outlook due to the policy signals of the US President-elect Donald J. Trump.

Mr. Trump has been bent on implementing stricter trade policies during his term, floating the idea of a universal tariffs of up to 20%.

“As one of the Philippines’ largest trading partners, it will not be able to shy away from the impact of these protectionist policies. Higher tariffs will make Philippine goods more expensive and less competitive in the US market, reducing demand for these exports,” BMI said.

It also noted the possibility of Mr. Trump’s trade policies stoking inflation, which could have implications on monetary policy.

“Additionally, Trump’s policies could lead to inflationary pressures in the US, prompting the Fed to slow the pace of its loosening cycle. And the BSP might have to follow suit in response.” — Luisa Maria Jacinta C. Jocson