More research firms cut PH growth estimates after disappointing Q2 print

More research firms slashed their economic growth forecasts for the Philippines this year, as they expect high interest rates to further crimp consumer spending and private investments.

In an August 15 report, HSBC Global Research cut its Philippine growth projection this year to 4.8% from 5.3%, following a “significant downside surprise” in the second quarter. It also trimmed its 2024 Philippine gross domestic product (GDP) forecast to 5.2% from 5.6%.

Nomura Global Markets Research also cut its Philippine growth forecast to 5.2% for this year from 5.5%.

The HSBC and Nomura forecasts are significantly below the government’s 6-7% growth target for the year.

This comes after the Philippine economy grew by a slower-than-expected 4.3% in the second quarter, from 6.4% in the first quarter and 7.5% a year ago. This was the weakest print in over two years, bringing average growth to 5.3% in the first half.

Economic managers earlier said GDP must expand by at least 6.6% in the second half to achieve the 6-7% target.

“The Philippines, which has been losing momentum in the last few quarters, faced a shock sequential contraction with GDP growth dropping to -0.9% quarter on quarter in the second quarter from 1% in the first quarter,” Nomura said in a note authored by analysts Euben Paracuelles and Charnon Boonnuch.

“Private investment will likely continue to face headwinds from substantially higher interest rates. We also expect external demand to remain weak, led by China, which is not recovering strongly,” they added.

Gross capital formation, which is the investment component of the economy, contracted by 0.04% in April to June. This was a reversal of the 12.6% growth in the first quarter and 17.2% in the second quarter of 2022.

HSBC said Philippine growth in the next four quarters would likely remain below the historical average mainly due to slower private consumption.

“Households that have dipped into their savings in the past three years will likely rein in their consumption to build their savings back up,” it said.

In the second quarter, household spending grew by 5.5%, slower than 6.4% in the first quarter and 8.5% a year ago.

“The government’s ongoing efforts to regain fiscal space will also likely keep government consumption softer than usual. The punchy rate hikes last year, as well, will come to the fore and rein in overall investment demand,” HSBC said.

The Philippine central bank has raised borrowing costs by 425 basis points (bps) from May 2022 to March 2023, bringing the key interest rate to a near 16-year high of 6.25%.

HSBC said the Bangko Sentral ng Pilipinas (BSP) would likely maintain a tight monetary stance for a prolonged period.

“We can see that the central bank’s tight monetary stance is already deep in the works — filtering through the economy by reining in investments. In particular, the growth in total outstanding loans to economic activities is moderating after briefly recovering post-pandemic,” it said.

Data from the central bank showed outstanding loans by big banks, net of reverse repurchase placements with the central bank, expanded by 9.4% in May — the slowest credit growth since 8.9%  in March 2022.

“We expect this to ease even further as the BSP keeps monetary policy tight for a prolonged period, only cutting policy rates when the Fed starts cutting rates,” HSBC said.

Meanwhile, Nomura said the BSP’s tightening cycle is likely over and that the policy pause might last until March 2024 due to the continued downtrend in inflation and slowing growth.

“Recent foreign exchange (FX) weakness may raise market expectations for a potential BSP response, but we think this will likely come via the combination of allowing the peso to adjust and FX interventions from time to time, rather than policy rate hikes,” Nomura said.

The research firm noted that there are ample dollar reserves and that the BSP will use these buffers to mitigate market volatility.

“At the same time, we think BSP will remain hawkish and not signal that it is considering rate cuts soon because, as BSP Governor [Eli M.] Remolona, [Jr.] argues, central banks should not be thinking about easing if there is a risk that they could be forced into reversing course quickly,” Nomura said.

However, it noted that the possibility of a hike is higher than the chances of a cut, amid recent food inflation concerns.

A BusinessWorld poll last week showed 13 of 15 analysts predicting the Monetary Board will extend its pause at its Aug. 17 meeting.

Wage hike
Meanwhile, the proposed P150 nationwide wage hike would likely cause the economy to further slow, National Economic and Development Authority Secretary Arsenio M. Balisacan said.

“Our GDP will contract by 0.2-0.9%. The unemployment rate will also increase from 0.3% to 1%. Inflation will also increase. And worst, the number of unemployed will actually increase. That’s the gist,” Mr. Balisacan told senators.

Senate President Juan Miguel F. Zubiri earlier pushed for the passage of a bill that seeks to hike daily wages by PHP 150 nationwide. 

Mr. Balisacan said the government needs to address the lack of quality jobs first.

“We understand what the problems are: high cost of energy, poor infrastructure, and high cost of doing business. We’re trying to address those. But, if we address the problem of low incomes now by raising wages, [the economy will slow down],” he said.

In June, the unemployment rate fell to 4.5%, from 6% a year ago. This brought the average jobless rate to 4.6% in the first half.

However, Mr. Zubiri said Filipinos will not be able to “survive” with such low salaries in the Philippines.

“How can you survive with then-PHP 570 a day salary, now PHP 610 a day? Transportation groups are asking for fare increases, electricity rates and pump prices are higher. And the P40 increase is just in Metro Manila,” he said. “I think we need to look into a possibility of increasing the wages of our people.”

A PHP 40 wage hike in the National Capital Region (NCR) took effect on July 16. Pending wage hike petitions for various provinces in the country will likely be decided on by September.

Finance Secretary Benjamin E. Diokno said a P150 nationwide wage hike may stoke inflation.

“The proposed PHP 150 increase could bring the country’s inflation rate further away…That kind of increase will have a second-round effect, wage can be passed on by businesses, industries, and other institutions to consumers,” he said.

Meanwhile, the economic team said the government is looking to consolidate the implementation of delivering ayuda, or cash subsidies to vulnerable sectors.

“Our approach in response to inflation is targeted intervention using targeted measures like targeting our ayuda to those who are most vulnerable,” Mr. Balisacan said.

Budget Secretary Amenah F. Pangandaman noted there is a high level of leakages in distributing subsidies and cash grants to beneficiaries.

She also said the government should consolidate the livelihood projects across all agencies to make it easier to give benefits to the beneficiaries. — By Keisha B. Ta-asan