PH seen maintaining growth path

The Philippines can maintain an economic growth of 6.7 percent this year despite the monetary tightening cycle initiated by the inflation-targeting Bangko Sentral ng Pilipinas, an economist from Citibank said.

In a research note, Citibank economist for the Philippines Jun Trinidad said the rate-tightening process would not necessarily curb the country’s potential for higher gross domestic product (GDP) growth.

During the BSP’s next policy rate setting on July 31, Citibank expects another 25-basis point special deposit account (SDA) rate increase to 2.5 percent against an unchanged policy rate. Citi also expects a policy rate rise of 25 basis points  (100 basis points=one percentage point) in the fourth quarter as well as in the first quarter of 2015.

“Our sanguine view of a macro backdrop that can withstand rate hikes rests primarily on the quality of first-quarter growth that remains favorable as indicated by a real investments ex-inventory contributing 24 percent of GDP—a recent high,” Trinidad said.

The economist noted that the key drivers of real investments, particularly construction and capital expenditures alongside rising incomes, were seen supporting strong demand. At the same time, he said that outstanding supply deficiencies, housing demand backlog, tightening capacity, strong public investments were appealing to supply-chain foreign direct investments.

Awarding of big-ticket public-private partnership (PPP) projects has also enhanced the investment outlook, Trinidad said. He noted the April labor survey, which reported an increase in manufacturing and construction jobs, could be attributed to higher investments and support a national jobless rate easing to 7 percent.

“Unlike the income variable, rising interest rates on average has a subdued impact on domestic spending,” he said.

The economist likewise said that negative real interest rate condition conducive to spending might take time to dissipate, adding that inflation expectations, which continued to exceed nominal short-term rates, would sustain negative real rates.

A 1-percentage rise in negative real rate is seen lowering real bank loans by a modest 0.0007 percent.

Trinidad cited the BSP’s second-quarter consumer survey where inflation expectations eased to 6.1 percent, down from 8.4 percent in the first-quarter survey, while consensus inflation forecasts remained in the 4-percent range.

“Upbeat consumer and business sentiment accompanied higher inflation and interest rate outlook although percentages of respondents expressing an elevated outlook may not be as high,” he said.