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The Philippines may not be able to achieve the upper end of the government’s 6.5-8% growth target next year amid global headwinds and the El Niño weather event, National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan said.

“I would not, this early, give away the 6.5% target, but the 8% may already be out of (reach). Reducing the range is one proposal, but we’ll see once we get all the information,” Mr. Balisacan told reporters at a briefing in Ortigas on Wednesday.

The NEDA chief cited risks such as the El Niño, which is expected to persist until the second quarter of 2024 and may send food prices spiraling.

Mr. Balisacan said he will maintain the 6.5-8% gross domestic product (GDP) growth target for the medium term.

“The reality next year is all the major multilateral agencies are seeing that the global economy is not as expansive as initially expected. For us to also ignore that is not good as well. There’s no harm in reducing that 8% to some-thing lower to be realistic, but not lower the 6.5% because then you’re surrendering too early,” he added.

Mr. Balisacan said he expects growth to continue to be driven by services, particularly tourism, as it has not returned to pre-pandemic levels.

“On the demand side, the good thing about the Philippine economy is we are not so dependent on exports as a driver of economic activity. It’s largely domestic. Although of course, if we get exports growing faster… we hope exports can recover towards the second half of next year,” he added.

Easing inflation will also help support growth next year. “If we can go back to 2-4% (inflation) next year, that will rekindle robust demand,” the NEDA chief said.

However, Mr. Balisacan flagged the potential impact of the El Niño weather phenomenon on the economy.

“We are keenly aware of the persisting challenges we confront as we aim to hit such a target. Elevated inflation remains a risk because of the onset of El Niño,” he added.

Latest data from the state weather bureau showed that a strong El Niño is present in the tropical Pacific and is showing signs of further intensification in the coming months.

While the dry spell may not necessarily impact growth, Mr. Balisacan said it could stoke inflation.

“With respect to growth, the effect on the economy, I don’t think it will make a big impact. The challenge will be more on the prices. If the prices pick up, then the gains we have made in (fighting) inflation will be reversed and we don’t want that. We (don’t want to) go back to the old cycle of high inflation, high interest rates, low demand, low growth,” he said.

The agriculture sector’s growth may be at risk next year due to El Niño. However, Mr. Balisacan noted that unlike previous El Niño episodes, the country’s dams have enough water to cover the dry spell.

Mr. Balisacan also said that the share of agriculture to the economy is smaller than in previous years, limiting the impact of the weather event on GDP growth.

Agriculture typically accounts for around 10% of the economy.

Science and Technology Secretary Renato U. Solidum, Jr. said on Tuesday that 65 out of 82 provinces will likely suffer droughts until May 2024 due to El Niño.

“We are watching closely the markets. If it affects many provinces simultaneously, that could lead to an uptick in prices, that’s what we want to prepare for,” Mr. Balisacan added.

He also said the NEDA is intent on ensuring that inflation returns to the 2-4% target band next year despite the El Niño.

“We will monitor closely and use tools in government, including trade policy tools to ensure we are able to minimize the negative effects of the El Niño phenomenon,” he added.

Mr. Balisacan said that frontloading imports could be one policy tool to mitigate price pressures brought by the dry weather event.

Meanwhile, Mr. Balisacan said that the government’s 6-7% GDP growth target this year is still within reach.

“We are confident we can still reach the lower end of the target or at the very least hit a figure near the lower end of the range. We need to grow by at least 7.2% in the fourth quarter to achieve the official target,” he said.

In the first nine months, the Philippine economy expanded by 5.2%.

The NEDA chief remained optimistic that fourth-quarter GDP growth will be strong due to an increase in household spending amid the holiday season.

EL NIÑO TO DELAY EASING

Meanwhile, Fitch Ratings said the Bangko Sentral ng Pilipinas (BSP), along with other central banks in the region, could delay monetary policy easing in 2024 due to likely high food inflation caused by El Niño.

In a Dec. 13 report written by Fitch analysts Thomas Rookmaaker and Kathleen Chen, the debt watcher said Asian central banks in emerging markets may see some relief once the US Federal Reserve starts policy easing next year.

However, some emerging economies such as the Philippines, India, and Thailand are still at risk from El Niño given the large weight of key food items in the inflation basket.

“Policy responses to potential high food inflation could include delayed monetary policy easing if it affects core inflation, subsidies and protectionism, such as India’s rice export curbs,” Fitch said.

India, Thailand and Vietnam are the largest rice exporters in the world, while the Philippines is more vulnerable as food importers.

The BSP is widely expected to keep its key policy rate at a 16-year high of 6.5% on Thursday, as forecasted by 15 out of 17 analysts from a BusinessWorld poll conducted last week.

A pause on Thursday would be the second straight meeting the BSP left rates unchanged since its 25-basis-point (bp) off-cycle hike on Oct. 26.

The BSP earlier said one of the key upside risks to inflation is the impact of El Niño on domestic food prices, along with higher transport fares, electricity rates, international oil prices, as well as high-er-than-expected minimum wage adjustments.

GlobalSource Country Analyst Diwa C. Guinigundo in a note said the BSP’s risk-adjusted inflation forecasts of 6.1% for 2023, 4.4% for 2024, and 3.4% for 2025 are still unacceptable relative to the 2-4% target.

This, as forecasts for the next two years still remain “uncomfortably close to the upper end of the 2-4% official target,” even if the BSP may announce new inflation forecasts on Thursday.

Mr. Guinigundo said the public should consider the BSP’s risk-adjusted inflation forecast rather than the baseline, as it gives “a more realistic picture of what to expect” amid all potential risks.

“We expect the prolonged dry spell, or El Niño, to hit the supply side and possibly cause an upset of the downward spiral. This could be worsened by higher transport cost and power rates as well as the anticipated minimum wage increases in areas outside Metro Manila,” he said.

Even if the Monetary Board pauses at the Dec. 14 meeting, the BSP is unlikely to immediately turn dovish given the long lag of monetary policy and the numerous risks to the inflation outlook, Mr. Guinigundo said.

“A more circumspect monetary authority will choose to play it safe and keep the policy rate at 6.5% for the time being and at least maintain a steady differential vis-à-vis the US Fed’s target interest rate. A weakening of the peso is a potential outcome, and that could motivate another price upsurge,” he said.

The US Federal Reserve kept the target Fed funds rate unchanged at 5.25-5.5% at its November meeting. The US central bank has raised 525 bps from March 2022 to June 2023. — By Luisa Maria Jacinta C. Jocson with Keisha B. Ta-asan 

The Philippines’ trade-in-goods deficit widened to a three-month high of USD 4.17 billion in October, as exports declined by double digits amid sluggish global demand.

Preliminary data from the Philippine Statistics Authority (PSA) showed the value of merchandise exports fell by 17.5% to $6.36 billion, from the 6.3% drop in September and a reversal of the 20.1% growth a year ago.

The contraction in exports was the steepest since the 20.2% drop in April.

The value of merchandise imports slid by 4.4% to USD 10.54 billion in October, reversing 7.7% growth in October 2022 but slower than the 14.1% drop in September.

October marked the ninth straight month of decline in imports, but the slowest contraction since the 1.2% in March.

This brought the country’s trade balance — the difference between imports and exports — to a deficit of $4.17 billion in October, widening from the USD 3.31-billion deficit a year earlier and the $3.58-billion gap in September.

The country’s balance of trade in goods has been in the red for more than eight years or since the USD 64.95-million surplus in May 2015.

For the first 10 months of the year, the trade gap narrowed by 11.9% to USD 44.07 billion from a year ago.

This as exports dropped by an annual 7.8% to USD 60.91 billion, while imports declined 9.6% to USD 104.97 billion in January to October.

The Development Budget Coordination Committee is assuming 1% and 2% growth for exports and imports, respectively, this year.

PSA data showed manufactured goods, which comprised 81.5% of the country’s total export receipts, declined by 21.1% year on year to USD 5.19 billion in October.

“The sharp decline in export growth can be attributed to base effects, but we anticipate ongoing challenges from weak global demand,” China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a Viber message that the steep drop in electronics exports weighed on overall exports.

Electronic products accounted for 56.9% of the total exports in October. However, they slumped by 28.9% to $3.62 billion from $5.1 billion a year ago.

The bulk of electronic exports came from semiconductors, which dropped by 34% to USD 2.83 billion.

“Imports were also down across the board, with capital and raw materials in the red yet again, suggesting soft capital formation and slower growth momentum,” Mr. Mapa said.

By major type of imported goods, orders of raw materials and intermediate goods slid by 7.5% to USD 3.82 billion. Import of capital goods fell by 4.6% to USD 2.86 billion, while consumer goods imports rose by 4.8% to USD 2.02 billion.

“The consecutive months of sluggish imports are concerning, particularly the lack of recovery in capital goods,” Ms. Velasquez said. “The lone bright spot is the resiliency of demand for consumer goods, but this will hardly be sustainable in spurring the economy towards a higher growth path.” 

By commodity group, importation of electronic products — accounting for almost a fifth of total imports — fell by 21% to USD 2.19 billion in October. Imports of mineral fuels, lubricants and related materials dropped by 5.3% to USD 1.79 billion.

“Third-quarter gross domestic product (GDP) was boosted by a positive contribution from net exports, but today’s trade data suggest the fourth quarter will see net exports swinging to a negative contribution to growth,” Mr. Mapa said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message that external trade data mainly reflect the risk of an economic slowdown in the United States, China and other major trading partners.

The US was the top destination of Philippine exports, accounting for 16% or USD 1.02 billion of total receipts. It was followed by Japan (14.2% or USD 902.65 million), and China (13.8% or USD 880.37 million).

China was the main source of imported goods in October at USD 2.6 billion, followed by Indonesia (USD 917.53 million), Japan (USD 834.89 million), South Korea (USD 785.81 million) and the United States (USD 711.77 million).

Ms. Velasquez expects slightly better export performance next year amid signs of recovery in global demand in Asian neighbors.

“However, it is essential to take further steps to diversify exports and encourage exporters to jumpstart their businesses,” she said. 

Mr. Ricafort said the recent decline in global crude prices and possible interest rate cuts would help support recovery in global investments and trade in 2024.

“The recent decline in global crude oil prices to five-month lows would help reduce the country’s oil import bill and would help narrow the trade deficit,” he said.

Ateneo de Manila University economics professor Leonardo A. Lanzona said the data show the trade sector is “at a standstill.”

“This again is a result of the absence of industrial policy. With high interest rates, the value of Philippine peso should have encouraged more imports. However, an overvalued peso could deter exports as well,” he said via e-mail.

“An industrial policy aimed at promoting products with comparative advantage or at creating new products could have broken this impasse.” — By Justine Irish D. Tabile, Reporter

The Philippine banking industry’s nonperforming loan (NPL) ratio rose to the highest in five months in October, as soured loans increased due to high borrowing costs.

Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed the banking industry’s gross NPL ratio inched up to 3.44% in October from 3.4% in the previous month and 3.41% a year ago.

This was also the highest bad loan ratio since 3.46% in May.

Bad loans increased by 9.2% to PHP 449.435 billion from PHP 411.632 billion a year earlier.

Month on month, it inched up by 1.2% from PHP 444.313 billion in September.

Loans are considered nonperforming once they remain unpaid for at least 90 days after the due date. They are deemed as risk assets given borrowers are unlikely to settle such loans.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the uptick in bad loans and the NPL ratio was largely due to rising interest rates.

“Policy rate hikes since last year due to higher prices increased the costs and narrowed the profit margins of some borrowers, somewhat reducing the profitability and the ability of some borrowers to pay, partly leading to some pickup in bad loans,” he said.

In an off-cycle move in October, the Bangko Sentral ng Pilipinas (BSP) raised borrowing costs by 25 basis points (bps), bringing the key rate to a 16-year high of 6.5%. 

Since May 2022, the central bank has raised the benchmark rate by a total of 450 bps to tame inflation.

“NPLs remain elevated because income is not yet catching up with high interest rates. The cost of borrowing remains high creating difficulties in repaying debts,” John Paolo R. Rivera, president and chief economist at Oikonomia Advisory & Research, Inc., said in a Viber message.

BSP data showed past due loans rose by 14.4% to PHP 557.083 billion in October from a year earlier. This brought the ratio to 4.26%, up from 4.03% in 2022.

On the other hand, restructured loans dropped by 5.5% to PHP 309.239 billion from PHP 327.355 billion a year ago. These borrowings made up 2.37% of the industry’s total loan portfolio, slightly lower than 2.71% in the previous year.

Banks continued to beef up loan loss reserves, which climbed by 7.4% to PHP 461.085 billion. This brought the loan loss reserve ratio to 3.53%, down from 3.56% last year.

Lenders’ NPL coverage ratio, which gauges the allowance for potential losses due to bad loans, edged lower to 102.59% from 104.27% a year ago.

Mr. Ricafort said a possible slowdown in the United States, China and other major economies could affect the Philippine economy.

“Slower global economic growth would also result in some slowdown in local business and other economic activities in terms of slower sales, earnings, employment and the ability to pay by some borrowers,” he said. — By Luisa Maria Jacinta C. Jocson, Reporter

The Philippine economy is expected to be the second fastest-growing economy in Southeast Asia in 2024, according to the Mastercard Economics Institute (MEI).

In its latest “Economic Outlook: Balancing Prices & Priorities” report, MEI gave a Philippine gross domestic product (GDP) growth forecast of 5.6% for 2024.

This would make the Philippines the second fastest-growing economy in Southeast Asia, just behind Vietnam which is projected to grow by 6.2%.

MEI data showed Philippine GDP will likely expand faster than Indonesia’s 5.1%, Malaysia’s 4.5%, and Thailand’s 3.4%.

Philippine economic managers are targeting 6.5-8% GDP growth next year.

MEI said the Asia-Pacific region is likely to see a modest GDP growth acceleration, although below trend, in 2024.

“While MEI believes that the global economy will feel more ‘normal’ in 2024 than the prior three years, it is still an economy in the process of rebalancing. This means consumers and corporations will be mindful of how to prioritize their spending and investment in an environment of shifting relative price differentials and higher borrowing costs,” it added. 

MEI cited several global risks that could impact the region’s growth next year, such as geopolitical tensions, persistent inflation, threats to financial stability, uncertainty in China, and climate disasters.

Meanwhile, MEI projected Philippine inflation to average 5.7% next year, well above the Bangko Sentral ng Pilipinas’ (BSP) forecast of 3.7%.

MEI’s inflation outlook for the Philippines is the highest in Southeast Asia, ahead of Vietnam (3.2%), Indonesia (3%), Malaysia (2.4%), and Thailand (1.8%).

The Philippines continued to experience elevated inflation this year, as food and transport costs rose.

However, inflation eased for a second straight month to 4.1% in November. It marked the 20^th straight month that inflation was above the central bank’s 2-4% target.

In the first 11 months, inflation averaged 6.2%, faster than 5.6% in the same period a year ago but above the BSP’s full-year baseline forecast of 6%.

As inflation eases, MEI said the Philippine central bank will likely cut policy rates to 6% next year.

“Central banks are likely at or close to peak rates. MEI expects some easing in 2024 as inflation cools while growth remains subdued. This could prompt a partial ‘normalization’ of monetary policy,” it said.

The BSP kept the benchmark rate at a 16-year high 6.5% in its latest November meeting. The central bank has raised rates by 450 basis points since May 2022.

The Monetary Board is set to have its last meeting this year on Thursday (Dec. 14).

BSP Governor Eli M. Remolona, Jr. last week said it is premature to discuss easing in 2024 until inflation stays within the 2-4% target. — Luisa Maria Jacinta C. Jocson