By Mayvelin U. Caraballo, August 11 2018; The Manila Times

Image Credit to Business Wire

Another 25-bps policy rate hike expected before yearend

A Fitch Group unit has cut its 2018 growth forecast for the Philippines following a substantial second-quarter slowdown, also warning of continued headwinds amid government claims of a production-led recovery in the months ahead.

In a report released on Friday, Fitch Solutions (formerly BMI Research) said it now expected GDP growth of 6.3 percent for the year, lower than the 6.5 percent previously projected, given the first half’s “weaker” 6.3 percent cumulative expansion.

The government on Thursday reported second quarter gross domestic product (GDP) growth of 6.0 percent, the slowest in three years. While an easing had been expected, the result was lower than the consensus view and likely put the official 7-8 percent growth target out of reach.

“Although the magnitude of the slowdown came as a surprise to us, the downward trajectory was in line with our expectations,” Fitch Solutions said.

It acknowledged that growth in the second quarter was primarily due to stronger government consumption, fixed capital formation and exports, but added that these were “more than offset by a slight slowdown in private consumption and a surge of imports”.

The government’s infrastructure drive, it noted, had driven up the stock of durable equipment and an acceleration in construction activity.

“While the investment drive is positive for the economy, which suffers from under-developed infrastructure, we question the sustainability of the government’s aggressive move, in the absence of improvements to the business environment and larger involvement of the private sector,” Fitch Solutions said.

“Over the coming quarters, we expect the economy to face mounting growth headwinds stemming from tighter monetary conditions both domestically and globally, deepening trade tensions between the US and its trade partners, as well as a sub-par business environment which will keep a lid on private investment,” the Fitch unit added.

Business environment decline

It highlighted a decline in the business environment, pointing to a plunge in the country’s competitiveness ranking and an unchanged Global Innovation Index placing that was marked by a “significant deterioration in the ‘rule of law’ sub-index, which dovetails with our observation that the freedom of press and the judiciary have been declining in the past two years”.

“We believe that this will continue to weigh on private and foreign investor appetite over the coming quarters,” it said.

Financial markets, described as providing insights on market sentiment and confidence, have also performed poorly with the peso down 6 percent against the dollar and counted as one of the worst-performing currencies in the region.

“Downside volatility over the coming months is likely to be exacerbated by deepening trade tensions between China and the US, which would not only weigh on global risk sentiment but also affect trade for the Philippines as the two leading economies are among the country’s top five trading partners, accounting for around 26% of both its exports and imports,” Fitch Solutions said.

Further BSP tightening

The second-quarter slowdown, it noted, was not enough to prevent another Bangko Sentral ng Pilipinas rate hike.
A 50-basis point (bps) adjustment — the steepest in a decade and double the 25-bps hikes ordered in May and June — was announced the day that GDP results were released, with monetary authorities blaming surging inflation.

“Given that the central bank maintained its hawkish tone in spite of lackluster economic performance … we have revised our forecast for the central bank to tighten its policy rate by a further 25 bps to 4.25% before end-2018,” Fitch Solutions said.

Rising inflation expectations and risk aversion were said to be causing the peso to weaken, and while the BSP can intervene to help stabilize the currency, “negative real interest rates and a tightening US Fed suggest to us that further interest rate hikes will likely be needed over the coming quarters to safeguard macroeconomic stability, and this is likely to come at the expense of growth”.

DoF optimistic

For its part, the Department of Finance (DoF) said on Friday that there was a “silver lining” to the second quarter slowdown.

In an economic bulletin, it said that 28.6 percent growth in durable equipment had supported capital formation, which rose by 20.7 percent during the quarter.

In line with a rebound in electronics components, exports of goods and services also recovered to a double-digit growth of 13 percent from 6.5 percent in the first quarter.

Consumer electronics and office equipment also showed triple-digit expansions, it added.

“These imply that the economy will be able to recover lost ground in the next quarters as the equipment and factories set up in the second quarter will start operations,” the department claimed.

It also said that a growing services trade surplus would sustain the rise in the goods trade deficit.

The “government is keeping its eye on the bigger picture, that is that growth, if it is to remain sustainably high, should be driven by investment.”

“Government should keep its focus on enhancing the country’s long-term prospects by increasing the economy’s productive capacity (through infrastructure and social services) while maintaining macroeconomic stability,” the DoF added.