By Lawrence Agcaoili and Louella Desiderio, September 24, 2023 ; The Philippine Star
Manila, Philippines — ING Bank cuts below five percent its 2023 economic growth forecast for the Philippines due to the further pickup in inflation as well as the possibility of additional interest rate hikes to be delivered by the Bangko Sentral ng Pilipinas (BSP).
ING Bank lead economist Nicholas Mapa said the Dutch financial giant further lowered its gross domestic product (GDP) growth forecast for the Philippines to 4.8 percent from the original target of five percent for this year.
Originally, ING Bank penned a GDP growth forecast of 5.5 percent for this year after the economy grew by 7.6 percent last year with the full reopening of the economy as strict COVID quarantine and lockdown protocols were lifted.
The Philippines emerged from the pandemic-induced recession with a GDP growth of 5.7 percent in 2021 after shrinking by 9.6 percent in 2020.
Due to external headwinds and the aggressive interest rate hikes delivered by the central bank, the country booked a slower-than-anticipated GDP expansion of 4.3 percent in the second quarter from 6.4 percent in the first quarter.
“After second quarter GDP, we lowered to five percent. Now with projected rate hikes and further pickup in inflation, it’s down to 4.8 percent,” Mapa said in a message to The STAR.
The economy grew by 5.3 percent in the first half and needs to grow by at least 6.6 percent in the second half to meet the lower end of the six to seven percent growth target set by the Cabinet-level Development Budget Coordination Committee (DBCC).
“Factors for the slowdown in growth will be the moderating pace of household consumption as revenge spending fades. 2022 and the early part of 2023 saw a spate of demand for activities related to travel and leisure with Filipinos happy to be able to out and about,” Mapa said.
With revenge spending fading and households moving to more normal consumption patterns, the economist said households would move to save more and pay down the substantial debt pile built up during the lockdown and the period of revenge spending.
He added that other factors that could cap growth momentum include the sustained moderation of capital formation as investment outlays actually saw a slight contraction in the second quarter with investors reacting to the overhang of slowing global and regional growth on top of slowing economic activity.
“Elevated borrowing costs are clearly having an impact on growth momentum with bank lending grinding slower to roughly seven percent from double digit gains earlier in the year,” Mapa said.
According to Mapa, the expected increase in government spending could offer some reprieve.
“Although given its relatively smaller contribution to overall growth, we are not confident it would be able to fully offset the slower pace of growth for consumption and capital formation,” he said.
Mapa said monetary tightening would not be effective in taming the spike in the cost of living as the cumulative 425-basis point-hike delivered by the BSP is still working its way through the economy.
“Rate increases of the past year are still working their way through the economy and will likely cap growth momentum well into 2024, with very little impact on bringing down inflation. Unless we see substantial improvement in supply conditions for food and energy, we could see inflation remain above target until November,” Mapa said.
After extending its hawkish pause by keeping rates steady last Thursday, BSP Governor Eli Remolona Jr. signaled a possible rate hike in November amid the upside risks to inflation that accelerated to 5.3 percent in August from 4.7 percent in July.
“Meanwhile, projected rate hikes by the BSP will not likely be able to address this contemporaneous price spike which in turn could push out the collective impact of rate hikes to all of 2024,” Mapa said.
ING Bank sees inflation accelerating to six percent this year from 5.8 percent last year before easing back to within the BSP’s two to four percent target of 3.6 percent next year.
After moving at a robust fast pace of six percent growth pre-COVID, Mapa said the return to the six percent growth trajectory may have to wait a bit longer as the Philippines is likely now faced with an extended period of high inflation.
Meanwhile, UK-based think tank Pantheon Macroeconomics said the country’s GDP growth likely slowed further to 1.8 percent in the third quarter from 4.3 percent in the second quarter.
“As things stand, we expect the Q3 GDP report – due a week before the (Monetary) Board next sits – to show that the economy contracted by a further 0.2 percent quarter-on-quarter, following Q2’s surprise 0.9 percent decline,” Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco and senior Asia economist Moorthy Krshnan said in a report.
“If we’re right, this would bring year-over-year growth down to just 1.8 percent from 4.3 percent in Q2, representing the weakest print since the global financial crisis, leaving aside the pandemic-era recession,” the economists said further.
They said a poor GDP print, however, would put BSP’s no rate cuts stance to the test in the fourth quarter.
Despite Remolona’s statement, the think tank said they continue to expect the BSP to start cutting rates in November.
“Really bad news is likely to come sooner rather than later, with our rate forecast predicated on the view that the Philippines is already in the middle of a shallow technical recession,” the economists said.