‘Mild’ economic slowdown seen in Q2

PHILIPPINE ECONOMIC growth may slow to below 6% in the second quarter, as elevated inflation continues to dampen consumer spending, First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in a joint report.

“We expect only a mild slowdown in Q2 by around 0.5 percentage points or slightly below 6% year on year, as the elevated inflation rate eats in consumers’ purchasing power,” they said in the May issue of The Market Call.

The Philippine economy grew by 6.4% in the first quarter, slower than the revised 7.1% growth in the previous quarter, and the 8% expansion in the first quarter of 2022. This was also the slowest growth rate in eight quarters or since the 3.8% contraction in the first quarter of 2021.

Economic managers are still confident of meeting the 6-7% gross domestic product (GDP) growth target for 2023.

“The downward trend will likely bottom in the second quarter as inflation eases and more employment and the income tax cut boost consumption spending,” FMIC and UA&P said.

However, they expect the economy to recover in the second half thanks to “muscular growth” in key services sub-sectors such as transport and storage, and accommodations and food services as tourism recovers.

The construction sub-sector is also expected to contribute to economic growth, thanks to flagship infrastructure projects such as the Metro Manila Subway, North-South Commuter Rail, and the South Expressway Extension.

“These large contributors to employment and slower inflation should combine to power more robust consumer spending, heretofore hindered by elevated inflation,” they added.

FMIC and UA&P now expect inflation to ease to an average of 6.3% in the second quarter, from 6.6% previously. Inflation is seen to further decelerate to an average of 5.1% in the third quarter, and 3.3% in the fourth quarter.

“The supply response to higher food prices earlier in the year appears to gain traction, while crude oil prices remain weak due to the global economic slowdown,” they said.

Headline inflation slowed to 6.6% in April, from 7.6% in March. For the first four months of the year, inflation averaged 7.9%, higher than 3.7% seen a year ago.

The BSP sees inflation settling within the 2-4% target band by September, and averaging 5.5% this year. It projects inflation to ease to 2.8% in 2024.

As inflation continues to slow, FMIC and UA&P said the BSP may be done with its tightening cycle.

“BSP has kept policy rates unchanged at 6.25% in its May 18 meeting, and we think it will have ended its policy rate hiking cycle, unless a major spike in inflation occurs or the exchange rate again rises too fast,” it said.

To tame inflation, BSP raised borrowing costs by 425 basis points (bps) since May last year, bringing the benchmark rate to 6.25%.

FMIC and UA&P also noted the peso may further depreciate against the dollar due to the country’s large trade deficits.

“The peso will likely remain under pressure due to elevated trade deficits and higher policy rates in the US by another 25 basis points in June,” they said.

‘READY TO USE ALL TOOLS’

At the same time, the Bangko Sentral ng Pilipinas (BSP) stands ready to use its tools to manage elevated inflation and maintain price stability, its governor said.

BSP Governor Felipe M. Medalla said on Monday that the central bank’s aggressive monetary tightening has not negatively affected the stability of the financial system.

“With the Philippine banking sector being liquid and well-capitalized, the central bank stands ready to use all the tools at its disposal to preserve price stability,” he said in a statement after Fitch Ratings affirmed the Philippines’ investment-grade credit rating.

Fitch maintained the Philippines’ long-term foreign currency issuer default rating at “BBB,” but upgraded its outlook to stable from negative.

A “BBB” rating indicates low default risk and adequate capacity to pay, although some unfavorable economic conditions could impede said capacity.

A stable outlook indicates that the country’s rating is likely to be maintained rather than lowered or upgraded in the medium and long terms or over the next 18-24 months.

Fitch downgraded the Philippines’ outlook to negative in July 2021 amid the pandemic.

In a statement released on Monday, Fitch cited the credibility of the BSP’s inflation-targeting framework and flexible exchange rate regime.

“Last year’s interventions to mitigate peso volatility have been reversed. Monetary financing to the government during the pandemic was more limited and was reversed more quickly than in some peers. The government’s response to the commodity price shock has been measured, for example in resisting calls to introduce fuel subsidies,” the credit rater said.

In an e-mail, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said Fitch’s decision to upgrade the outlook to stable was due to the country’s strong economic performance following the pandemic.

Fitch expects the Philippine economy to grow by above 6% in the medium term, which is “considerably stronger” than the “BBB” median of 3%.

“Better credit ratings help the Philippines finance expenditures at a lower cost as borrowers will be more reassured of getting paid back on time. A lower credit rating could translate to higher borrowing costs,” Mr. Mapa said.

However, he noted that it is crucial for the Philippines to maintain its current growth momentum.

“Robust growth delivers fresh revenues which in turn improves fiscal balances while faster growth helps dilute the above threshold debt-to-GDP ratio,” he said.

At the end of March, the National Government’s debt as a share of GDP stood at 61%. This is still above the 60% threshold considered manageable by multilateral lenders for developing economies.

The government aims to trim the debt-to-GDP ratio to less than 60% by 2025 and to 51.5% by 2028.

Mr. Mapa added that a large deterioration in the country’s external balances could weigh on the outlook moving forward, while sustaining growth and improving governance standards could support a ratings upgrade.

The country has maintained the same investment-grade credit rating from Fitch since December 2017. — K. B. Ta-asan