Inflation woes seen tempering PH growth

The Philippines will unlikely hit its economic growth target in the next two years due to expectations of sustained higher consumer prices in the near term, the Washington-based Institute of International Finance (IIF) said.

In a May 1 country report titled “Philippines: Balancing Growth and Inflation,” the IIF projected a 6.7-percent gross domestic product expansion this year, the same rate as last year’s, before slowing to 6.6 percent next year.

The IIF’s forecasts for 2018 and 2019 were below the government’s yearly target of 7-8 percent growth starting this year to 2022.

“Pursuing growth while maintaining price stability is the primary challenge for policymakers in the Philippines this year. For the first time in many years, the authorities are facing an economy running close to potential, which has given rise to mounting inflation pressure testing the upper limit of the central bank’s inflation target range. We foresee successful policy coordination, balancing expansionary fiscal spending to support growth with a tighter monetary policy stance to anchor inflation expectations,” the IIF said in the report.

As such, “tighter monetary conditions will likely prevent growth this year and next from reaching the official target range of 7-8 percent,” it said.

The IIF report authored by Asean and India research head Reza Siregar, economist Kevin Sanker and senior research analyst Yuanliu Hu said a sustained robust GDP expansion in the near term was expected to be “driven by strong private and public consumption, as well as robust investment led by the government’s infrastructure program.”

“Further improvement in the employment rate and rising capacity utilization in the manufacturing sector will provide additional evidence of growth running near potential,” the IIF said.

“On the external front, we anticipate a wider current account deficit due to strong demand for investment-related imports,” the IIF added.

Last year, the current account deficit ballooned to $2.5 billion, the biggest since 1999 due to a surge in imports that also resulted in a wider trade gap.
“The deficit doubled last year to 0.8 percent of GDP and we forecast it to grow further to 1.5 percent in 2018 and 1.7 percent in 2019, larger than the consensus estimate” of 0.7 percent this year and 0.6 percent next year, the IIF said.

Market concerns on the prevailing current account deficit had weakened the peso to 11-year lows, also putting pressure on the prices of basic goods.

Last month, the Cabinet-level Development Budget Coordination Committee raised the foreign exchange rate assumption for 2018 to 2022 to 50-53:$1, from 49-52:$1 previously, on expectations of a weaker peso in the medium term due to the huge fiscal stimulus in the United States.

“The Philippine peso was among the region’s weakest currencies through April, and we expect it to weaken further this year as trade and current account deficits widen, despite foreign direct investment and remittance inflows. The central bank’s decision to keep the policy rate on hold thus far amid rising inflation has added to depreciation pressure. However, likely rate hikes later this year may provide some support,” the IIF said, adding that it sees the domestic currency further depreciating to 54.3:$1 by end-2018.

Coupled with rising global oil prices, new or higher excise taxes slapped on a number of products under the Tax Reform for Acceleration and Inclusion (TRAIN) Act also elevated inflation at the start of the year.

In this regard, “we expect headline inflation to climb in the first half of 2018, peaking in July around 4.8 percent year-on-year, and averaging around 4.3 percent for the year, above the upper end of the Bangko Sentral ng Pilipinas inflation target range of 2-4 percent,” the IIF said.

“Headline inflation should remain elevated above 4 percent year-on-year for the rest of 2018 and only fall within the official target range in early 2019. We forecast headline inflation to moderate to 3.3 percent next year, similar to the BSP forecast of inflation rising to 4.3 percent in 2018, before settling at 3.5 percent in 2019,” according to the IIF.

In the first quarter, headline inflation averaged 3.8 percent, near the upper end of the government target, after peaking to an over five-year high of 4.3 percent in March.

“Risks to [the Philippines’] growth this year are coming from the policy tension between growth and inflation,” it said.

The IIF said “the key this year is to stabilize inflation expectations and anchor inflation within the BSP target range.”

“Promoting growth while maintaining price stability is thus the primary challenge,” it said.—BEN O. DE VERA