Growth seen to slow in Q4

The Philippines is unlikely to hit its growth target of 6-7% this year as economic activity may slow in the fourth quarter.

The Bank of America (BofA) Global Research raised its Philippine gross domestic product (GDP) growth forecast to 5.4% this year from 4.8% previously.   

“We place 2023 GDP growth at 5.4%, up from 4.8% previously, and still implies slightly slower growth in the fourth quarter of 2023,” the bank said in a report dated Nov. 9.

If realized, this would be slower than the 7.6% growth recorded in 2022.

“We think the surge in government spending seen in the third quarter may not extend into the fourth quarter given the constraint posed by the budget and the fiscal deficit,” it added.

The Philippine economy grew by 5.9% in the third quarter from the 4.3% in the second quarter. For the first nine months, economic growth averaged 5.5%.

The economy will need to grow by 7.2% year on year in the fourth quarter to reach the low end of the government’s 6-7% target.

At the same time, the BofA Global Research raised its Philippine GDP forecast for 2024 to 5.4% from 5% previously. This is also below the government’s 6.5-8% target.

The bank trimmed its Philippine inflation forecasts following the lower-than-expected inflation print in October.

It now sees inflation averaging 6% this year (from 6.1% previously) and at 3.3% in 2024 (from 3.5%).

Annual headline inflation slowed to a three-month low of 4.9% in October from 6.1% in September. But it still marked the 19^th straight month that inflation breached the central bank’s 2-4% target band. For the 10-month period, inflation averaged 6.4%.   

BofA Global Research expects the BSP to maintain the key interest rate at 6.5% this year, before cutting by 100 basis points (bps) to 5.5% in 2024. 

High rates
Meanwhile, the ASEAN+3 Macroeconomic Research Office (AMRO) said the BSP can keep the key policy rate at its current level as inflation is expected to further ease.

“According to AMRO’s baseline projections, the output gap is expected to remain positive while inflation should gradually return to its target band in 2024, which suggests that the current tightened monetary policy stance is appropriate,” AMRO said in its latest Annual Consultation Report.

“The policy rate can be maintained at the current level to keep monetary policy tight, as it is above the neutral rate and the projected decline in inflation will keep the policy rate positive in real terms,” it added.

At its policy meeting earlier this month, the BSP kept its target reverse repurchase rate at 6.5%, the highest in 16 years.

Since May 2022, the Monetary Board has raised borrowing costs by a total of 450 bps.

The Monetary Board will have its last policy meeting for the year on Dec. 14.

AMRO’s model showed that the central bank’s current policy rate of 6.5% is “appropriate” based on the think tank’s growth and inflation forecasts for this year.

“The BSP’s monetary policy tightening between 2022 and October 2023 has been timely and necessary, as inflation was also demand-driven according to AMRO’s findings,” it added.

However, AMRO also said that if inflation remains elevated and above the target range for a prolonged period, there may be a need for additional monetary tightening.

“However, the decision should take into account the delayed transmission of past tightening, and the impact of additional rate hikes on financial stability — in particular, the financial health of vulnerable borrowers such as households and MSMEs (micro, small, and medium enterprises),” it said.

“In a different risk scenario, if downside risks were to result in a sharp and persistent economic slowdown in the coming quarters, monetary policy easing in coordination with a reallocation of budgetary funds to support vulnerable groups could be warranted. In that way, fiscal policy can provide support without derailing the fiscal consolidation plan,” it added.

The central bank said inflation could fall within the 2-4% target in the first quarter of 2024. However, BSP Governor Eli M. Remolona, Jr. earlier said inflation may pick up again to above 4% from March to July next year.

The think tank said that the government’s policy mix should be “flexible and data dependent.”

“Authorities should be vigilant in monitoring the evolving economic situation under high uncertainties, particularly with respect to price and growth developments,” it added.

It also recommended an “all-of-government approach” to address supply-side factors and help bring down inflation. Targeted subsidies may also be implemented to help lower-income groups cope with rising prices.

Also, AMRO said that the BSP can use macroprudential tools to strengthen financial stability.

“Additional macroprudential tools such as the debt-service-ratio may also be considered to ensure appropriate lending standards in light of more intensive competition in the consumer loan segment. In view of high nonperforming loan ratios which are pandemic-related, banks are encouraged to help households and MSMEs in distress to restructure their debts,” it said. — Keisha B. Ta-asan and Luisa Maria Jacinta C. Jocson