Credit Suisse lowers PH growth forecast for 2014

Zurich-based financial group Credit Suisse has tempered its 2014 economic growth forecast for the Philippines on expectations of a “subdued” second quarter performance as suggested by disappointing export receipts in April.

In a research note dated June 10, Singapore-based CS economist Michael Wan said his company had cut its full-year Gross Domestic Product forecast for the Philippines this year to 6.2 percent from 7 percent, reflecting the likely weakness in exports.

The weaker-than-expected export receipts in April, Wan said, could be partly due to the increase in Japan’s value added tax (VAT).

“Nonetheless, domestic demand (investment and private consumption) should continue to be robust, reflecting in part the lagged impact of loose monetary policy last year,” Wan said.

In April, Philippine exports rose by a meager 0.8 percent year-on-year versus the consensus year-on-year growth outlook of 10 percent for the period and CS’ estimate of 8 percent.

In particular, Philippines’ exports to Japan fell by 5.5 percent year-on-year in April, a reversal of the 50.9-percent rise the previous month.

The research noted that electronics exports also declined by 2.5 percent year-on-year, from a 10.1-percent rise in the previous month.

“We believe this weaker than expected export number reflected the impact from Japan’s VAT hike,” Wan said.

“The collapse in exports broadly supports our earlier findings that the Philippines is one of the most exposed to a slowdown in Japanese domestic demand from the Japan VAT hike among non-Japan Asia countries,” he said.

Two reasons were cited for this big impact of Japan’s VAT hike on the country:

Exports to Japan represent a significant share of total exports for the Philippines (around 20 percent); and

a significant proportion of exports to Japan from the Philippines are products which cater to domestic demand in Japan and are particularly price sensitive to the VAT hike (like electronics and electrical equipment).

“While this is still early days, we highlight that this April export print implies that second quarter 2014 GDP growth should continue to be subdued, following the lower-than-expected first quarter 2014 GDP print of 5.7 percent year-on-year,” Wan said.

The first quarter expansion underperformed the 6.4-percent consensus growth forecast for the period.

The economist said many observers could be overestimating the eventual bounce in second quarter GDP, as they had attributed the slowdown in first quarter growth solely to Typhoon Haiyan (locally known as “Yolanda”).

Wan doubted that the supertyphoon alone could explain the weakness in the first quarter Philippine GDP growth, noting that the downside surprise could also reflect the following:

a cutback in industrial production in anticipation of a slowdown in Japan’s consumer demand in second quarter which could also explain the downside surprise in April exports; and,

a larger than anticipated impact on industrial production activity from the announced Manila truck ban in the second quarter.

“While the government and local Manila officials have recently allowed trucks to travel at a special designated lane on certain roads, it is still unclear at this point how much this would ease congestion at the ports and infrastructure bottlenecks,” Wan said.