PHL growth seen to fall short of target this year

THE PHILIPPINE economy’s growth may fall short of the government target this year, as interest rates may continue to rise amid sticky inflation.

In a note dated Feb. 8, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the bank expects the country’s gross domestic product (GDP) to grow by 5% this year, lower than the government’s 6-7% goal.

“Although the 2022 GDP result surprised on the upside, fading revenge spending, sticky inflation, uncertainty over interest rates and tight fiscal purse strings all point to the Philippines missing its growth target this year,” Mr. Mapa said.

Headline inflation accelerated to 8.7% in January, marking the 10^th straight month that inflation exceeded the central bank’s 2-4% target.

“Elevated inflation and households opting to rebuild savings could mean that consumption will moderate while high borrowing costs have already begun to cap the upside to capital formation,” Mr. Mapa said.

He expects a moderate pace of government spending this year due to the “relatively tight fiscal space.”

“One additional factor that could slow growth even further this year is the projected global downturn and its impact on Philippine exports. And although exports remain a modest portion of the Philippine economy, the potential slowdown of overseas remittances may be sizable enough to pose yet another challenge to domestic consumption,” Mr. Mapa said.

Amid the various challenges faced by the economy, he said the 5% GDP growth forecast “can be considered quite respectable against the backdrop of a likely global recession.”

In a separate note, HSBC Global Research said the BSP might deliver a 50-basis-point rate hike next week to tame inflation, which is now seen to average 5.7% this year.

“The January CPI (consumer price index) numbers were eye-watering,” HSBC Economist for ASEAN (Association of Southeast Asian Nations) Aris Dacanay said, adding that most economists expected inflation to have peaked at 8.1% in December.

Inflation accelerated 8.7% year on year in January, well above the 7.5% to 8.3% forecast range given by the BSP.

“The big upside surprise in January has set the tone for the inflation outlook for the rest of the year. We therefore raise our 2023 inflation forecast to 5.7% from 5.0%, but our 2024 forecast remains unchanged at 3.6%,” he said.

“All these numbers suggest that the policy rate outlook is more than just following the Fed in lock step — it is also about the Philippines facing an inflation problem of its own. Supply constraints are posing a risk of rising inflation expectations, while demand from the country’s economic ‘reopening’ remains strong,” he said.

According to HSBC Global Research, the BSP has room to raise interest rates further given the surprising growth last year. The central bank is seen to deliver more rate hikes after its meeting next week, with the policy rate peaking at 6.5% in May before pausing for the rest of the year.

“The BSP’s tone next week will probably lean towards data dependence. But if it turns out that January isn’t the peak (i.e. inflation accelerates in February), another 50-bp hike is likely to be on the table at the Monetary Board meeting in March,” Mr. Dacanay added.

The BSP is scheduled to have its first two policy meetings on Feb. 16 and March 23. — KBT