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Local demand to support 7% GDP growth

By: Doris C. Dumlao, June 25th, 2013 08:26 PM

Despite a less robust backdrop, solid domestic demand in the Philippines is likely to support an economic expansion of 7 percent this year.

This was the view of Citigroup economist for the Philippines Jun Trinidad, who said in a commentary dated June 21 that other than a reflection of balance sheet concerns, the Bangko Sentral ng Pilipinas’ decision to end easing the rates on special deposit account (SDA) suggested that the existing monetary policy could mitigate downside growth risks. He cited upbeat fiscal spending as the appropriate spending catalyst in support of domestic demand and job creation.

In 2014, the Citi research projected that the BSP’s overnight policy rates could start rising by as much as one percentage point. From the current record-low level of 3.5 percent for the overnight borrowing rate, the BSP is seen tightening the rate to 3.75 percent by the first quarter of next year, rising to 4.25 percent in the second quarter and 4.5 percent in the last quarter.

The outlook on interest rates assumes an uptick in the country’s inflation rate from an average 2.8 percent this year to 3.2 percent in 2014.

Trinidad said the latest BSP decision had also “put the burden on the weak Philippine peso as the key adjustment mechanism to absorb prevailing macroeconomic shocks while easing demands on interest rates that may only court asset bubble risk rather than lift demand.”

With robust macroeconomic gains while facing external shocks, he said the peso weakness would likely persist with BSP intervention in play to ease rapid exchange rate changes. He said risk sentiment would likely lead to a consolidation of the peso at levels below 43:$1.

“Flipside of a weak Philippine peso is that remittance families would get a lift from windfall income with the peso down to 43. With benign inflation risk, the exchange lift could range from an additional P3-P3.6 billion or 0.3 percent of real consumption. Relatively weak peso in the second quarter that enhances price competitiveness of farm and mineral products (17 percent of exports) bode well for labor-intensive employment. Alongside windfall peso impact but lacking upside inflation would be stronger consumer sentiment that would redound to firmer consumption,” the research said.

Meanwhile, Trinidad said recent headline estimates of jobless rate and exports suggested slower growth in succeeding quarters but still averaging 7 percent for the full year.

“Fiscal catalysts, windfall gain of remittances from weak Philippine peso, upbeat sentiment and monetary accommodation support solid domestic demand,” Trinidad said.

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