Better PH economic growth seen in 2019

The Philippines may see a slight improvement in economic growth and a drastic decline in inflation this 2019 after a challenging period last year, but the peso may resume a “gradual” depreciation to 55 against the US dollar through next year, economists from British banking giant Standard Chartered Bank said.

The country’s gross domestic product (GDP) may grow at 6.4 percent this year from last year’s 6.2 percent, still mostly driven by consumer spending, while average inflation will drop to 3.5 percent this year after spiking to 5.2 percent last year, Stanchart economist for Asia Chidu Naranayan said in a press briefing on Tuesday.

Naranayan said consumption would still be the biggest driver of growth, although the contribution might be slower than in the last two years, while public and private investment would also be a key driver.

After strengthening in the fourth quarter of 2018, mostly due to the seasonal influx of remittances from overseas Filipinos and the aggressive local interest rate hikes by the central bank, Stanchart sees the peso slipping to 54:$1 by the middle of this year and further to 55:$1 by this year-end through 2020.

“We expect gradual and modest depreciation of the peso in 2019,” said Divya Devesh, head of foreign exchange research at Stanchart, adding that the fundamental reason would still be the large importation of capital goods that in turn would boost US dollar demand and result in another year of current account deficit.

But Devesh noted that the country’s growth story remained strong, thereby attracting foreign fund flows, while the Bangko Sentral ng Pilipinas had enough ammunition, such as ample foreign reserves, to tackle currency volatility.

“Unlike three or four years back when peso was quite overvalued, now we don’t think it’s overvalued. It’s very close to fair valuation,” he said.

Naranayan said the Philippines would face another year of current account deficit due to the importation of iron, steel and other capital goods needed for infrastructure-building, but he said this deficit would likely be smaller than the levels seen in 2017 and 2018.

As for inflation, it is expected to go back to the BSP’s targeted range of 2-4 percent, even if oil prices are assumed to average at $78 per barrel.

Oil prices could be a key risk, however, if prices go back to over $84 per barrel.