Sound fundamentals to buoy economy this year
The economy will grow at a more modest pace this year, albeit at a level still above the long-term average, due to weak demand for the country’s exports and slow state spending.
British bank Standard Chartered in a report said growth this year would reach 5.7 percent before reaching 6 percent in 2016.
In 2014, growth stood at 6 percent and in 2013, at over 7 percent. In the decade preceding the Aquino administration, annual growth was below 5 percent.
“The domestic economy remains solid. Philippine household consumption outperformed that of other Southeast Asian economies over the past four to five years,” the bank said in a report to clients.
This new projection followed the government’s report last week that showed the Philippine economy grew by 5.6 percent in April to June of this year. This was better than the 5.2-percent expansion recorded in January to March.
The government has an economic growth target of at least 7 percent this year. Officials have said this goal would likely be cut to a more realistic 6 to 6.5 percent.
Standard Chartered said steady levels of investments both by locals and foreigners would help prop up growth this year. The performance in the second quarter was due in part to the recovery in government spending, after a lackluster first quarter.
Investment rose by 9 percent in the second quarter, supported by public construction and purchases of durable equipment.
“Improving labor market fundamentals, remittances and services exports should remain supportive of the domestic economy going forward,” the firm said.
Socioeconomic Planning Secretary Arsenio Balisacan said election-related spending would likely boost the economy by 0.3 to 0.7 percentage point. Finance Secretary Cesar Purisima, for his part, added the Philippines is more insulated against China’s economic developments.
“In addition, a modestly weaker Philippine peso may also benefit export growth this year,” Standard Chartered said.
American banking giant JP Morgan Chase, meanwhile, upgraded its growth forecast for the Philippines this year following the robust growth recorded in the second quarter.
In a research note dated Aug. 27, Singapore-based JP Morgan chief economist for Southeast Asia Sin Ben Ong said he is now expecting the country to grow its GDP this year by 5 percent from 4.1 percent previously.
The upgrade was announced as the Philippines’ second quarter GDP growth rate of 5.6 percent exceeded JP Morgan’s expectation of 4.9 percent. JP Morgan’s forecast was much lower than the consensus expectation for a 5.7 percent growth for the second quarter.
In sequential terms, Ong said the economy had grown at a very strong pace of 7.9 percent on a seasonally adjusted quarterly comparison.
Domestic demand had driven growth even as exports continued to soften, the economist noted.
“Like the rest of the region, exports in second quarter 2015 were soft, contracting 10 percent quarter-on-quarter (seasonally adjusted). However, despite the slowdown in external demand, domestic demand has remained unexpectedly robust and this strength runs against the conventional narrative that incomes from exports tend to drive domestic demand, especially investment,” Ong said.
“While JP Morgan had in the past noted that domestic infrastructure investment via the PPPs (public private partnership framework on infrastructure projects) would add to growth, the resilience of non-construction fixed investment despite slowing exports is striking,” the economist said.
Despite the strong second quarter performance, the economist said the Philippines must brace for some slowing this second semester.
“Although it is tempting to suggest that the Philippines investment cycle marches to the beat of a different drum than the region, the JP Morgan view is that the export slowdown should, via income effects, eventually percolate through to domestic demand. Thus, we maintain a somewhat soft second half growth trajectory to reflect that impact,” Ong said.
The economist noted, however, the country is a “beneficiary of its own positive dynamics.” This means the economy is more insulated from the recent market volatility.
These buffers include, among others, declining inflation, very easy credit and liquidity conditions, and contained capital outflows, which have helped keep the foreign exchange relatively stable, Ong said.
“Thus, the Philippines should be less affected by tightening external financial conditions relative to its regional peers, and thus suffer less of a hit to growth,” Ong said.
In addition, the economist said domestic business sentiment remained broadly positive, as reflected in business sentiment surveys. The country also has historically low domestic interest rates and accommodative credit conditions, he added.
“All of these factors should be supportive for domestic demand which should also be complemented by the PPP infrastructure spending,” he said.
Meanwhile, the country’s Trade chief remains optimistic that the Philippine economy will prove to be resilient and will be able to withstand the weakness in global financial markets given sound fundamentals and a diversified economy.
“Overall, our economy is more resilient because (the Philippines) is growing really fast. Second, our banks are adequately capitalized so they can withstand a lot of weakness in the financial markets. Third, we have a small budget deficit that allows us to have enough policy space,” Trade Secretary Gregory L. Domingo said in an interview.
“Also, we have now a diversified economy unlike before when the country was highly dependent on certain segments such as remittances and manufacturing, which is mostly comprised of electronic products. Now, we have diversified products for exports and a big component in our economy is outsourcing [or services]. So, diversification matters when we face [global volatilities] because there won’t be any particular sector that can hurt you so much because we have many cylinders firing,” he said.
Domingo told the Inquirer that the softening of China’s economy will certainly have an impact on the economy considering it is one of the country’s biggest trade partners. But this development is not unique to the Philippines alone. Only Vietnam has registered a positive trade growth with China, he noted.
“There is a weakness in the Chinese economy. If you look at the importations of China, and the exports of neighboring countries, they are all showing a decline. A lot of the things that China imports are inputs, or raw materials and equipment that are factors to production, so that the decline is a leading indicator of weakness. And that affects us because China is one of our top three trading partners,” he added.
Despite this, Domingo is hoping to reverse the decline seen in the country’s trade situation.
“Latest data showed imports growing stronger and so hopefully, that’s a reversal of a trend we’ve seen earlier this year. In the first five months of the year, we’ve seen weak imports. Hopefully, we’re turning the corner in terms of weakness in trade data,” Domingo said.
In June this year, the country’s imports rose 22.6 percent to $5.9 billion from the $4.8 billion recorded in the same month last year on the back of growth in shipments.
“Import data is a leading indicator. An increase meant that there are more shipments of raw materials, [such that] machinery and equipment were made… If we can sustain that, hopefully, we can also see a rebound in exports,” Domingo said.
