Economic growth in Q3 seen at more than 8%

The Philippine economy may have expanded by more than 8 percent in the third quarter from a year ago on a turnaround in exports, buoyant fiscal spending and strong purchasing power of remittances, American banking giant Citigroup said.

Citi economist for the Philippines Jun Trinidad also said the peso might strengthen closer to the 42 levels against the US dollar by the end of the year as monetary authorities might tolerate currency appreciation to curb inflation pressures coincident with the season of strong remittance inflows.

In a research note dated Oct. 25, Trinidad said his team’s earlier third-quarter gross domestic product (GDP) growth outlook of 6.9 percent could be exceeded despite some risks from weak farm output arising from monsoon and typhoon shocks.

Among the things to watch for, Trinidad said, would be faster primary fiscal spending due to a spate of flooding and typhoon damage in August-September as well as rehabilitation and relief aid following military conflict in Zamboanga City and Bohol earthquake. “Third-quarter GDP (gross domestic product) growth may probe 8 percent year-on-year despite these shocks, when money supply eases following 30 percent year-on-year rise in August,” Trinidad said, adding that the pace of growth might hit as high as 8.8 percent for the quarter.

For the full year, Citi is retaining its GDP growth forecast of 7.3 percent for the Philippines despite the upside risk to the third-quarter outlook.

Following the strong growth in August exports (+20.2 percent year-on-year), Trinidad said third-quarter export receipts could rise by 7.3 percent, potentially snapping out of two straight quarterly declines.

Higher net export contribution to third quarter GDP of 2.4 percent versus Citi’s base case estimate of 0.7 percent is seen having a potential GDP impact. “Lacking upside symmetry for imports, the higher net export contribution could yield third-quarter GDP growth of 8.8 percent year-on-year,” he said.

“This hefty August export gain is unlikely to recur for the rest of the year but it marks a good turning point for exports,” the economist said.

Another GDP stimulus for the third quarter is the strong purchasing power of overseas Filipino workers’ (OFW) remittances, which likely uplifted household consumption, he said.

Trinidad estimated that the weak peso exchange rate in July-August coupled with disinflation during the period enabled the real peso value of remittances to rise by 9.1 percent year-on-year in August after a 7.5-percent increase in July.

For the third quarter, he said, the real peso value of remittances probably elevated its share of real household consumption to 16.9 percent from 14-15 percent share in the first half of the year. “This higher ratio in third quarter 2013 strongly suggests basic and discretionary spending can be given a stronger lift by OFW remittances,” he said.

Likewise noted was the 18.8-percent expansion in primary fiscal spending stimulus in July-August.

Meanwhile, Trinidad said that lacking monetary tightening, the Bangko Sentral ng Pilipinas might relent to a peso-dollar exchange rate below 43 in response to inflation upticks coincident with the yearend remittance season.

The research said it could still sense the BSP’s strong “pro-remittance peso bias” by defending the 43:$1 mark through spot market purchases and by keeping the onshore swap market rate negative.

“Lacking monetary tightening signals/actions amid an EM (emerging market) risk-on environment (after a US fiscal crisis was averted), we expect Philippine peso to be allowed to breach downside of 43 in November-December coincident with a strong end-year remittance season and seasonal import slack,” the research said.

Trinidad added that rising external surpluses from the remittance-driven current account alongside sustained foreign reserve stock of $83.5 billion would also argue for a strong peso exchange rate against the dollar.