High inflation, investment slowdown to drag growth

By: - Reporter / @daxinq
/ 05:32 AM October 11, 2018

The Philippines is facing a perfect storm of economic woes, both from overseas and within, that will cap growth next year, a foreign think tank said on Wednesday.

In a research note to its clients, Capital Economics said high inflation and a slowdown in private investment would weigh down the local economy over the coming quarters.


“In contrast to the consensus, which is expecting growth to rebound next year, we think [gross domestic product (GDP) growth] will slow to just 6 percent in 2019,” the think tank said, citing the stubbornly high inflation as the country’s main economic challenge at present.

“The main concern for policymakers is the recent surge in inflation which shot up to a nine-year high of 6.7 percent in September,” it said.


“Higher oil prices, a weaker peso and disruption to food supplies from Typhoon ‘Mangkhut’ [Typhoon “Ompong”] mean inflation is likely to remain above the central bank’s target until late 2019,” it added.

Capital Economics said it expected inflation to remain a drag on consumer spending for some time to come.

Higher interest rates

In what some market watchers believe is a belated response to the sharp rise in inflation, the Bangko Sentral ng Pilipinas has raised its key interest by a cumulative 150 basis points, or 1.5 percentage points, the last of which was implemented just last month.

“With the [central] bank worried about inflation expectations becoming increasingly unanchored, another 100 basis points of hikes are likely before the year is through,” Capital Economics said.

Higher interest rates, meant to fight inflation, have the effect of making loans more expensive. This makes it costlier for large companies and entrepreneurs to borrow funds for expansion. It also makes existing loans more expensive.

All of these contribute to slower economic growth.


Capital Economics said another drag on growth would come from the weak export sector.

“Our forecasts for global growth are consistent with a further easing in external demand,” the think tank said.

“Meanwhile, import growth is set to continue at a rapid pace, driven by the booming demand for capital goods and raw materials to supply the government’s infrastructure drive,” it added.

With exports set to weaken but imports likely to remain strong, the current account deficit—the tally of the country’s trade-related dollar transactions with the rest of the world—is likely to widen further, putting the peso under further pressure.

P58 to a US dollar

“We expect the peso to fall to P58 against the US dollar by the end of next year,” Capital Economics predicted.

“A weak currency is a concern for the authorities because of the upward pressure it will put on import prices,” it said.

Capital Economics also predicted that a slowdown in private investment would be a drag on growth.

“President Duterte’s growing authoritarianism looks to be putting off many foreign investors — the country has slipped down the league tables for political stability, and pledges of new FDI [foreign direct investment] are near an all-time low,” it said.

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TAGS: Capital Economics, Fuel Prices, Inflation, Philippine economy, rising prices
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