PH expected to miss 2019, 2020 GDP goals
Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Wed, 27 Feb 2019 16:30:16 +0000
Philippine economic growth will fall below target this year and the next, one of the big three debt watchers and an economist from a multinational investment bank said on Wednesday.
Citing high interest rates and weak external demand, S&P Global Ratings forecast gross domestic product (GDP) growth of 6.4 percent for 2019 and 6.6 percent for 2020, below the government’s 7.0-8.0 target for both years.
UBS Executive Director and senior economist for Asean David Teather, meanwhile, told reporters that growth was unlikely to hit 7 percent in 2019 and 2020. He tagged the US-China trade war as the limiting factor for this year and pointed to a weak external environment as the likely reason for a below-target 2020.
S&P’s forecasts are still an improvement from last year’s growth of 6.2 percent, which also fell below the government’s downwardly revised
goal of 6.6-6.9 percent. UBS, on the other hand, expects a slowdown to 6.1 percent for this year and the next.
In the report, S&P said its “relatively slow forecasts relative to pre-2018 actuals reflect challenges from the lagged dampening effect on the economy” of last year’s policy rate hikes “as well as the weak regional electronics sector that will continue to weigh [on] external demand.”
The Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board raised key interest rates five consecutive times last year, for a total of 175 bps, after inflation breached the 2.0-4.0-percent target starting March.
Inflation peaked at a nine-year high of 6.7 percent in September and then eased beginning November, prompting monetary authorities to pause from further tightening in December and February.
Outbound shipments of electronic products — the Philippines’ top export — plunged by 15.2 percent in December but still managed a full-year rise of 2.8 percent. Overall, merchandise exports fell by 1.8 percent in 2018.
S&P also warned that uncertainties over US interest rates and trade tensions between developed countries posed risks to the Philippine economy.
The debt watcher said it continued to expect the Federal Reserve to merely pause, in contrast to market expectations of a full stop or possibly some easing.
“This dichotomy leaves the potential for market repricing, which could lead to a resumption of pressures on EM (emerging market) currencies,” S&P said.
Worries over emerging markets led to the peso hitting a near 13-year low of P54.325 to the dollar in September last year but the currency has since recovered, on Wednesday closing at P51.91:$1.
“Another risk to the economy comes from global trade tensions, which could exacerbate the ongoing regional moderation in the electronics sector,” S&P also said.
Upside from trade row
UBS’ Teather, meanwhile, said the trade war had an upside for the Philippines.
“The term we use is pain before gain,” he told reporters at the sidelines of a forum.
“In the immediate future you have a disruption to global trade and that’s a break on growth,” he added.
“Export growth in the Philippines is not very strong but further down the road, the disruption elements in the trade war will diminish and the gain element from FDI (foreign direct investment) flows, shifting supply chains, from taking market share of Chinese exporters with tariff rates raised on them in the US will deliver some benefits to the Philippines.”
Teather said UBS also expected inflation to further ease this year, hitting around 3 percent by the second half on account of government efforts to stabilize prices.
Jody Santiago, head of research for UBS in the Philippines, said this would allow the benchmark Philippine Stock Exchange index to end 2019 at 8,900.
The stock market, which hit a record close of 9,058.62 on January 29 last year, succumbed to volatility as 2018 progressed. On Monday, it fell by 1.24 percent to 7,889.12, weighed down by foreign selling.
Banking risk assessment improved
In another development, S&P announced a revision to its Banking Industry Country Risk Assessment (Bicra) for the Philippines, which was raised to group “5” from “6” based on a view that the institutional framework had been improved due to amendments to the BSP’s charter.
Bicra risks run from 1 (lowest risk) to 10 (highest risk) and the revision tags the Philippines as “high risk” instead of the previous “very high risk”.
“We believe the amendments to the Bangko Sentral ng Pilipinas charter significantly improve the supervisory powers of the regulator by giving better legal protection to officials,” S&P said.
Other key changes, it noted, include increased central bank capitalization to P200 billion from P50 billion, expansion of its regulatory powers over the industry, and higher penalties for supervised entities found in violation of the law.
S&P also said that the Philippines’ revised Bicra resulted in a higher starting point for rating banks.
The stand-alone credit profile (SACP) of Security Bank was raised to ‘bbb’ from ‘bbb-’ but its issuer credit rating was kept at ‘BBB-/A-3’ “due to the bank’s lower capital sustainability and earnings buffer compared with similarly rated peers.”
It also raised state-owned Development Bank of the Philippines’ SACP to ‘bb+’ from ‘bb’, saying “we see an almost certain likelihood that the Philippines government will provide timely and sufficient extraordinary support to the bank if needed.”
Overall, the debt watcher expects credit growth in the Philippines to hit 14-15 percent this year, tempered by a higher interest rate environment, from 14 percent in 2018..
It also believes that the banking system has sufficient capital buffers and coverage against non-performing assets to withstand emerging risks from currency volatility, higher interest rates, slower growth, and global macroeconomic headwinds.
Deposit growth, however, is likely to remain slower than loans, leading to a gradual increase in the loan-to-deposit ratio that rose to 79 percent as of end-2018.
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