Economic growth is expected to slow down slightly this year despite the lofty target set by the Aquino administration as the country struggles to move to a higher growth trajectory.
The Bank of the Philippine Islands (BPI) expects tighter funding conditions as lenders suffer from lower trading gains caused by volatility in financial markets.
Over the weekend, BPI lead economist Emilio Neri Jr. said the Philippine economy’s faster-than-expected expansion in 2013 was mainly driven by domestic consumption, instead of higher investments, which are needed to bring the country to a higher growth trajectory.
“Unless private and public sector capacity building efforts accelerate sharply this year, overall output or real gross domestic product (GDP) growth in 2014 is likely to slow down by roughly a full percentage point,” Neri said in a commentary.
The Philippine economy, in GDP terms, grew by 6.5 percent in the fourth quarter of last year, representing a slowdown from the revised 6.9 percent expansion recorded in the previous three-month period due to the effects of Supertyphoon “Yolanda.”
This brought full-year growth to 7.2 percent, which was still better than the government’s target range of 6 to 7 percent for the year.
This year, Neri said, the country’s growth may fall short of the government’s target of 6.5 to 7.5 percent.
“Investment activity also got a boost from the bevy of funds migrating from the special deposit accounts into the banking system, with road vehicles demand—which we associate more with consumption than investment—accounting for 37 percent of total durable goods demand,” Neri said.
“This means very little capacity-building to take the economy to a higher growth trajectory (of 8 to 10 percent) has taken place,” he added.
Another drag on growth this year would be the repatriation of funds back to advanced economies like the United States and countries in Europe as the Federal Reserve continues to scale back its monetary stimulus for the American economy.
Neri cited the possibility of the “wealth effect” taking place in the country, referring to an expected drop in spending that accompanies declines in individuals’ perceived wealth. This would be spurred by lower values of assets like stocks and other investments.
“Volatile global and domestic financial markets (via the wealth effect), combined with slightly faster headline inflation and borrowing costs, could slow the rest of the Philippine spending accounts this year,” he said. Paolo G. Montecillo