MUFG sees PH economy growing by 5.6% this year

The Philippine economy may grow by 5.6% this year as easing inflation could help boost consumption, MUFG Global Markets Research said.

In a report, MUFG Global Markets said the Philippine gross domestic product (GDP) is forecast to expand by 5.6% this year, picking up from the likely 4.8% GDP growth in 2023.

However, the growth forecast is below the Philippine government’s 6.5% to 7.5% growth target for 2024.

“We think that headwinds to domestic demand from elevated food and energy prices should gradually fade over time, but the growth rebound will probably be more evident from the second half of 2024 onwards, assuming no further food supply shocks,” it said.

Philippine GDP growth accelerated to 5.9% in the third quarter, mainly driven by faster government spending, while private consumption slowed. This brought the nine-month GDP growth average to 5.5%, still below the government’s 6-7% full-year target.

“The more stable external environment, coupled with stable USDPHP (US dollar-Philippine peso exchange rate), should also help Bangko Sentral ng Pilipinas (BSP) keep rates on hold through the next few months, and to start the rate-cutting cycle from the second half of 2024, as such helping investment and private consumption activity,” the research firm said.

MUFG Global Markets Research expects the BSP to cut interest rates by 50 basis points (bps) this year. This would bring the benchmark rate to 6% by end-2024, from the current 16-year high of 6.5%.

The Monetary Board has raised borrowing costs by a cumulative 450 basis points (bps) from May 2022 to October 2023 to tame inflation.

“We think the Philippine central bank will remain cautious for now, even as it looks more likely now that the Fed will start its rate-cutting cycle in 2024, together with the recent progress in bringing inflation down. This is also because upside risks to inflation are still present,” the research firm said.

Markets are anticipating the US Federal Reserve will begin cutting rates this year as inflation eases. At its December meeting, the Fed had forecast 75 bps in rate cuts for 2024.

“We think the Philippines’ central bank would prefer to take its lead from the Fed and wait for the US rate-cutting cycle to be clearly underway, before commencing its rate cuts,” it said.

For this year, MUFG Global Markets Research said Philippine inflation is seen to slowly return to the upper end of the BSP’s 2-4% target band if there are no more supply shocks.

“We expect the Philippines’ CPI (consumer price index) to fall into the central bank’s upper half of the inflation target by the first quarter 2024, and to stay around that range through the course of 2024… There are nonetheless still upside risks to inflation stemming from food supply shocks, possible transport fare hikes, and minimum wage increases,” it added.

BSP Governor Eli M. Remolona, Jr. said last month the central bank will likely keep benchmark interest rates higher for longer until inflation settles at around 3%.

MUFG Global Markets Research said the Philippine peso will likely underperform in 2024, as the current account deficit is seen at -3% of GDP and the central bank beefs up its foreign exchange reserves.

It expects the peso to end at PHP 55.40 per dollar by the first quarter of 2024, and by PHP 55 per dollar by yearend.

“Our forecasts imply some underperformance in PHP against other Asian FX (foreign exchange), but to a lesser extent than before, with lower global oil prices and fading of domestic food supply shocks helping to contain both inflation pressures and the current account deficit,” it said. — AMCS