GDP growth seen back to 6% in ʼ20

After economic expansion fell to an eight-year low last year, the Philippine domestic economy is widely seen to expand at a faster pace and return to
above-6 percent growth trajectory this 2020, supported by higher public spending and easy monetary policy.

London-based Capital Economics expects the Philippines to remain among the fastest-growing economies in the region this year even as the
impact of a surge in spending at the tailend of last year is expected to fade.

Ayala-led Bank of the Philippine Islands (BPI) and research firm Fitch Solutions both expect the country’s gross domestic product (GDP) growth
to improve to 6.3 percent this year.

British banking giant HSBC expects the country’s GDP growth to come in at 6.4 percent, while Union Bank of the Philippines and Japanese investment house Nomura expects even higher growth rates of 6.6 percent and 6.7 percent, respectively.

In a research note, BPI economist Emilio Neri Jr. said that with the government budget in place, the economy could see higher growth this year but
noted that delays and challenges in the implementation of infrastructure projects might prevent growth from surging beyond 6.5 percent.

“As we have seen in 2019, infrastructure development plays an important role and its failure could pull down growth and derail the momentum
of the economy. Meanwhile, the private sector investment spending may also recover on the back of lower interest rates.

The fundamentals of the economy still provide the necessary conditions for investment spending as corporates need to expand their productive capacity through the purchase of fixed assets in order to meet the requirements of consumers,” Neri said.

Neri said global oil prices might see upward pressure from changes in shipping regulations, production cuts from oil producing countries and
geopolitical tensions in the Middle East, but their impact could be tempered by global trade uncertainties. As such, BPI’s average inflation forecast
for 2020 is 3.4 percent.

For its part, HSBC’s growth outlook assumes an increase in fixed investment. It also forecasts a 50-basis point overnight policy rate cut by the Bangko
Sentral ng Pilipinas (BSP) this first half of 2020.

Fitch Solutions upgraded its 2020 growth forecast for the Philippines to 6.3 percent from 6.1 percent, owing to base effects, combined with fiscal and
monetary stimulus and a modest improvement in the external demand.

“We expect another insurance cut to the key policy rate in early 2020, by 25 basis points to 3.75 percent, and note further reductions to the reserve
requirement ratio are also likely.

This should support credit supply, which slumped through 2019 and will feed through to domestic demand,” Fitch Solutions said.

Carlo Asuncion, economist at Union Bank of the Philippines, said GDP growth this year might settle at 6.6 percent and further rise to 6.7 percent in
2021 while inflation would likely remain benign at 2.8 percent this year. He sees a potential uptick in inflation to 3.7 percent in 2021.

Nomura’s 6.7-percent growth outlook assumes higher public investment spending as the government gains more traction on infrastructure projects as well as private consumption due to tight labor markets and record-low unemployment rates.

“While much attention has been paid to the fact that the government missed last year’s growth target of 6-6.5 percent, we believe the 5.9-percent outturn remains strong and, as we have been arguing, the Philippines was a regional standout last year,” Nomura said.

“The growth trajectory from here is more important, and we think the economy remains on track to a V-shaped pick-up. Most notably, another
budget delay has been averted this year. As a result, we expect the fiscal stance to turn highly expansionary this year and forecast the fiscal deficit widening to 3.3 percent of GDP from an estimated 2.6 percent last year. This should ensure uninterrupted implementation of government’s spending plans, which should, in turn, result in even faster growth in coming quarters [in addition to low base effects].”

Nomura added that the country’s capacity utilization rates were also at record highs, particularly in the industrial sector, suggesting that, as long
as growth prospects remained positive and infrastructure was still being prioritized by the government, private investment prospects should also remain positive.

Citing the Philippine Statistics Authority’s (PSA) data on fourth-quarter 2019 GDP performance, Capital Economics Asia economist Alex Holmes
noted that “a strong rise in government spending was the primary driver of the pick-up” in growth to 6.4 percent, the fastest in six quarters.

“Growth [in public expenditures] rose from 9.6 percent year-on-year in the third quarter to a whopping 18.7 percent last quarter. Much of this was
likely due to the release of withheld spending from the first half of the year, which had been delayed by the late passing of the 2019 budget,” Holmes
said in a Jan. 23 report titled “Pick-up in growth unlikely to be sustained this year.”

“Also likely related to budget delays was the continued recovery in investment. Construction jumped 11.7 percent year-on-year, as stalled infrastructure projects got back into full swing,” Holmes added. Despite the jump in fourth-quarter GDP growth, full-year 2019 expansion averaged only 5.9 percent, an eight-year low and below the government’s downscaled 6-6.5 percent target range.

For this year, Holmes said “we don’t think the economy will continue to pick up speed.” “For one thing, the spike in government spending in the
fourth quarter will prove temporary, as distortions relating to the delayed 2019 budget fade.

With this year’s budget targeting an unchanged deficit of 3.2 percent of GDP, we don’t think government spending will provide much of a boost to growth in 2020,” Holmes explained.

“Meanwhile, export growth is likely to remain subdued by past standards if, as we expect, global growth only recovers slowly,” Holmes said.

As such, Holmes said Capital Economics kept its 2020 growth forecast for the Philippines at 6 percent. “While this would make the Philippines one
of the fastest-growing economies in the region, it would be well-short of the government’s 6.5-7.5 percent target.”