THE PHILIPPINES can stay on a resilient growth path, with expansion rate exceeding 5 percent yearly, whoever will become the next CEO (chief executive officer) of the land, investment bank BofA Merrill Lynch said.
In the Philippine chapter of a Dec. 7 research note “Asia 2016 Year Ahead,” Merrill Lynch disagreed with other views that the uncertainty over the outcome of the general elections in May 2016 could undermine investment spending and near-term growth.
“We believe investment spending by the private sector, which looks to have peaked in 2014, is still expected to remain elevated in 2015-2016,” said the research note, which is written by analysts Jojo Gonzales and Claudio Piron.
At the same time, the analysts said government spending was only beginning to accelerate in the second half of 2015—and should continue through 2016, noting that the government’s 2016 budget still implied a 15-percent nominal spending growth.
“Perhaps the fear ahead of the 2016 elections rests in the fact that President Aquino cannot seek reelection, and that the last five years have been the best five-year period in GDP (gross domestic product) growth terms in more than three decades,” the research stated.
In the last five years of the Aquino administration, the Philippine economy has grown by an average of 6.3 percent versus the 4.8 percent growth rate during the nine-year term of Gloria Macapagal-Arroyo. The trend growth rate under the Ramos regime was at 3.1 percent while that during the term of Corazon Aquino, the late mother of the incumbent president, was 3.4 percent.
“However, we argue that the fiscal reform and monetary policy path benefiting the Philippines today began seven to eight years ago, and was strengthened by the current government,” the research note said.
To recall, an increase in the value added tax (VAT) was implemented during the Macapagal-Arroyo administration. The move helped the country avert a financial crisis at that time.
“The current government is credited for spending reform and enhanced revenue collection—practices that have taken root and should continue beyond 2016,” the research note said. “In this context, a longer-term GDP growth rate in excess of 5 percent per year is likely achievable.”
On foreign exchange, Merrill Lynch expects the Philippine peso to stay under pressure in 2016 due to muted foreign exchange flows into equities as well as a historically strong real effective exchange rate, which necessitates nominal depreciation to restore competitiveness.
“Overseas workers remittances and higher revenues from the outsourcing sector will provide an element of support but not be enough to buck the regional trend of weak foreign exchange,” the research said.
Merrill Lynch changed its yearend 2016 peso forecast to 50 against the US dollar from its earlier forecast of 48.80 to $1.
For 2016, the research projected GDP growth to ease to 5.5 percent, lower than the consensus of 5.9 percent.
“We are more cautious of growth in agriculture and exports but believe that buoyant private consumption and resurgent government spending should be enough to drive growth,” it said.
Despite these challenges, Merrill Lynch continued to expect a current account surplus, modest fiscal deficit and monetary policy room afforded by low inflation. “All these make for a resilient growth path for Philippines,” it said.
The main risk for the country, the research pointed out, would be “if weaker global growth would undermine the income or employment of overseas Filipinos or the outsourcing trend.”
Under such a scenario, it said, the Philippine GDP growth might slip below 5 percent.
Remittances from OFWs and earnings from the business process outsourcing (BPO) sector have underpinned growth in private consumption, buoyed demand for residential property, and kept the current account in surplus in the country.
On the proposed 2016 budget, the research note said this indicated an expansionary fiscal policy, which it expected to lead to an increase in government bond issuance in 2016.
“The government plans to borrow more money domestically than abroad. We see a healthy demand for bonds from the onshore and the offshore communities,” it said.
In the meantime, monetary policy divergence is seen being more pronounced in the coming year. “Low inflation is providing room for easing but concerns over capital outflows and weak currencies may tie the hands of some central banks,” the research note said.
China, India and Indonesia are seen by Merrill Lynch to ease and cut interest rates in 2016 while Thailand and the Philippines are forecast to tighten and hike policy rates. Malaysia, Taiwan and Korea are seen to stay on hold in 2016.