Slower growth, weaker peso seen

European investment banking giant UBS sees the Philippine peso weakening to 51:$1 and the domestic economy growing at a slower pace of 5.6 percent next year before picking up pace in the years ahead on the back of infrastructure spending.

In a research note, UBS projected the peso to fall further to 55:$1 by 2018, citing the narrowing of the country’s external account surplus.  Rising inflation is also seen to prompt a 50-basis point increase in key interest rates by the Bangko Sentral ng Pilipinas in the coming year.

“So far, 2016 has seen extremely strong domestic demand and a booming investment growth delivering better than expected real gross domestic product growth. The drivers of this boom were likely election-related spending and loose monetary conditions that fueled credit growth,” UBS said in the research note.

“We expect both of these to reverse in 2017 as deficit projections show a smaller fiscal impulse, and global monetary conditions tighten,” it said.

The projected GDP growth of 5.6 percent next year is way below the 7 percent average so far seen in the first three quarters of 2016.  By 2018, UBS sees the growth to picking up to 6 percent.

Ahead of the election in May 2016, UBS noted that the government’s fiscal deficit had widened sharply from 0.9 percent of GDP in 2015 to 2.7 percent of GDP (seasonally adjusted) in the second quarter of 2016. It said this had provided a sizeable “fiscal impulse”—defined as the year-on-year change in the fiscal deficit – to spur growth.

With the government forecasting fiscal deficits of 3 percent of GDP in both 2017 and 2018, UBS said there was little fiscal impulse coming through in 2017 and possibly none in 2018.

“But, the new administration has set its focus on big infrastructure projects (including those part-financed by the private sector, or even by foreign governments). This could allow fiscal policy to be more supportive of growth than the deficit implies,” UBS said.

“We doubt that this boost will come as early as 2017, infrastructure projects tend to be plagued by delays, but better traction on public projects could lift growth in 2018,” it said.

UBS sees risk of government spending initially outpacing revenue growth, resulting in a higher deficit than projected over the next two years.

On external accounts, UBS said the deterioration in the country’s current account over the past four quarters. It expects a recovery in the current account balance as weaker domestic demand curbs import growth, but expects the acceleration in growth in 2018 and rising oil prices to induce a deficit of 1.3 percent of GDP in 2018.

“Political relations with the next US President as well as US fiscal and trade policy more generally are potential swing factors for Philippine goods and services exports,” UBS said.

On several occasions, Duterte has indicated his preference toward a more “independent” foreign policy.

On inflation, UBS said that while the uptick in consumer prices remained fairly benign in the Philippines, a change was likely starting 2017 with the projected rebound in oil prices.  Being a net oil importer, a rebound in oil prices is seen to jack up inflation in the country.