BPI cuts Philippine growth forecast

The Philippine domestic economy will likely expand at a much slower pace than expected this year but it is in a better position to withstand another global economic downturn and financial shock waves, according to the Bank of the Philippine Islands.

In its latest monthly economic research dated September 15, BPI tempered its full-year gross domestic product growth outlook for the Philippines this year to 4.9 percent from 5.4 percent, noting that the government might have already missed the boat in mobilizing its fiscal resources enough to offset year-to-date weakness and sustain its initial growth assessment.

The research, written by a team led by economist Emilio Neri Jr., also noted that prospects of a US “double dip” were creating genuine fear of a wider and deeper global recession than in 2008-2009. BPI said this meant that global financial markets seemed poised for a lot of short-term pain “and whether this is a Lehman-style collapse or just a bearish correction of the two-year long bull market rally, the fallout will not be pretty and no one will be spared from significant losses.”

But the Philippine macro-environment makes for an interesting microcosm of the global situation, the research said, noting a fairly resilient domestic economy, which managed to stay on a growth path during the global economic crisis. This track record, it said, could be the only explanation for the record drop in local interest rates despite the indisputably disappointing second-quarter growth performance.

The country’s GDP for the second quarter grew only 3.4 percent and thus fell way short of market expectations of 4.9 percent and the government’s forecast of 4.5-5.5 percent.

“Still, some fibers in the safety net may be better woven than others. We could hardly conceive the Philippines falling into recession should the world’s economy contract once more, given our relatively minimal exposure to global trade, while most overseas Filipinos are deployed in critical, recession-proof industries and still provide a historically reliable stream of foreign inflows,” the paper said. What was true in 2009 is still true to this day, it pointed out.

The industry sector is seen growing 5.2 percent this year and services, 4.9 percent, while agriculture is expected to expand by 4.1 percent.

Given the relative resilience of domestic consumer spending, the research noted that the steady appreciation of the peso has also eroded the value of overseas remittances in peso terms, suggesting this would take its toll on spending.

The research said the Bangko Sentral ng Pilipinas would have to continue walking a fine line of monetary policy and the national government would have to step up. It said “the weakening global growth outlook and the threat of a US stimulus-induced commodity price elevation creates a serious hyper-stagflation scenario.”

Stagflation refers to a period of sluggish economic growth and rising unemployment and yet consumer prices are rising.

The Philippines’ performance in the first semester, the research said, seemed to indicate that the country might have missed an opportunity to use the fiscal flexibility achieved recently. It added that the unexpected contractions in merchandise exports in May, June and July seemed to have caught the government flat-footed, inasmuch as they were apparently unprepared to employ counter-cyclical measures.

“In which case, the national government may already be walking a narrow causeway, where price stability may have to be bought at the cost of economic growth, depending on what the US Fed will eventually do,” the research said.