Higher growth of 7.2% seen for PH this year

The Philippine economy can grow at a faster pace of 7.2 percent this year given the favorable momentum aided by election-related spending early in the year and an ongoing private construction boom, New York-based think tank Global Source said.

The think tank, in a June 14 research titled “Markets Stirred; Economy Will Chug Along,” significantly upgraded its growth forecast from an earlier outlook of 6.1 percent for 2013 and raised its growth outlook for 2014 to 6.2 percent from 5.8 percent.

In 2012, the Philippine economy grew by 6.8 percent.

Authored by economists Romeo Bernardo and Marie-Christine Tang, the research pointed out, however, that the upgrades on gross domestic product (GDP) growth forecasts were mostly based on the business cycle rather than a permanent structural shift being awaited by prospective investors, including a new class of players that can invest only in investment-grade markets.

“Our GDP revisions reflect largely the high current election-related spending growth, including likely front-loading in public infrastructure that may last only up to this quarter, and the ongoing private construction boom, a lagging indicator of past investment decisions in residential and business buildings that, according to industry experts, take two to three years to complete,” the research said.

It pointed out that just two weeks after the government announced a much-better-than-expected 7.8-percent GDP growth in the first quarter that bucked the regional growth slowdown, many were stunned by the steep stock market fall, especially following a new round of upgrades in analysts’ growth forecasts.

“In truth, financial market volatility has greatly increased in emerging markets since the US Fed (Federal Reserve) started hinting at slowing down its bond-buying program with worries about a rapid rise in interest rates exacerbated by the Bank of Japan’s recent decision not to expand its monetary stimulus,” the research said.

The losses extended to the bond and currency markets with local interest rates having risen by more than 70 basis points on average since mid-May and the peso losing about 5 percent against the dollar over the same period, it noted.

“Rather than a change in internal fundamentals, we think that the drop in the equity, bond and peso markets is more a reflection of portfolio flows going back to the US with its emergent recovery and expectations of an end to the Fed’s quantitative easing,” it said.

The research added that the maturing of the construction boom alongside rising interest rates would likely bring growth back to more normal levels, perhaps as early as late 2014 or early 2015.

“The much hoped-for revival of investments in PPP (public-private partnership) or in industrial zones may not be significantly large to keep growth high beyond 2015,” it said.

Meanwhile, Global Source said the earlier reduction in rates on special deposit accounts (SDAs) and the recent peso depreciation against the dollar would help repair the Bangko Sentral ng Pilipinas’ balance sheet and increase its policy flexibility.

During its monetary-setting meeting last Thursday, the BSP’s policy-making Monetary Board kept its key policy rates unchanged. The overnight borrowing rate was maintained at 3.5 percent and the SDA rate at 2 percent.

The BSP has previously slashed the SDA rate by a total of 150 basis points and last month announced limits to trust accounts’ access to the facility, which will be phased over the next six months.

“In light of the capital outflows, the moneys expected to be pushed out of the SDA facility are not expected to be inflationary and given their conservative risk profile, will likely have limited impact on prices of risky assets,” Global Source said.