Nomura raises 2018 PH growth forecast

Japanese financial giant Nomura has raised its 2018 growth forecast for the Philippines while projecting four interest rate increases next year on expectations that the inflation rate could exceed the government’s target range.

In a Dec. 7 report titled “Asia in 2018: Stretching the sweet spot,” Nomura said that it was most upbeat on economic prospects for the Philippines, India and Indonesia next year.

In the case of the Philippines, Nomura said it still viewed the growth outlook as solid and raised its 2018 gross domestic product (GDP) growth forecast slightly to 6.9 percent from 6.8 percent earlier and from 6.7 percent in 2017.

“We also expect growth to rise further to 7.1 percent in 2019. A pick-up in global growth and the tech cycle, which looks like it can remain on an upswing longer than we initially anticipated, should supplement already strong domestic demand conditions,” Nomura added.

Nomura expects the Duterte administration’s ambitious “Build, Build, Build” infrastructure program and comprehensive tax reform to sustain robust economic growth in 2018.

“For next year, despite a likely increase in political noise, we expect the government’s focus on reforms to remain strong, alongside its drive to raise infrastructure spending further, which will be boosted by the reconstruction in Mindanao following the prolonged antiterrorism military operations in Marawi,“ according to Nomura.

Also, it said the implementation of the first package of tax reforms at the beginning of 2018 would not only provide the government with significant revenues for infrastructure and social spending, but it should also boost disposable incomes of the middle class via substantial personal income tax cuts.

“Beyond that, policymakers remain firmly committed to pushing a broader set of complementary reforms such as streamlining the budget process, local government capacity building, new monitoring systems for infrastructure projects and improving financial inclusion. These in our view are underappreciated, and should ultimately help increase investment-to-GDP ratios toward levels that Asian tigers have reached in the past to sustain high GDP growth rates and raise per capita incomes,” it added.

Nomura nonetheless flagged risks to the inflation outlook next year as it jacked up its forecast to 4.3 percent from 3.9 percent previously, hence breaching the government’s 2-4 percent target for 2018.

“This forecast is partly driven by our new 2018 oil price assumption ($65 a barrel), combined with the impact of tax reform (assuming the House version is adopted) and the output gap becoming more positive despite potential growth rising to an estimated 6.2 percent,” Nomura explained.

“We think the BSP will not be able to look through the risk of headline inflation breaching its target in 2018. As a result, we now expect the BSP to hike its policy rate by a total 100 basis points to 4 percent at a rate of one 25-basis point hike per quarter,” Nomura said.

In 2014—the last time the BSP hiked rates—Nomura said it was all about inflation risks, with the rate increases characterized by the BSP as a “preemptive response” to the balance of risks around inflation experiencing a further upward shift and put the target at risk. “We think demand-side pressures are even stronger today than in 2014 and this inflation expectations are also likely to accelerate amid supply-side increases from oil prices and tax reforms,” Nomura noted.
While generally bullish about the economy, Nomura said the key risks to its view continued to emanate from the domestic political environment, even though it argued that these risks had dissipated from last year, when the uncertainty around the war on drugs was complicated by foreign policy issues.

“President Donald Trump’s recent visit to Manila reaffirms our view that US ties remain strong. We will also watch closely President Duterte’s popularity ratings—results from more recent surveys have been more mixed, which is a departure from his uniformly high popularity ratings previously—particularly ahead of the 2019 midterm elections. If his control over Congress wanes, it could have implications for future phases of tax reform,” it said. —BEN O. DE VERA