Philippine economy seen to weather global crunch

The Philippine economy is “ready to weather global storms” although at risk of growing at an even slower pace this 2012 compared with last year on lackluster exports and investment prospects, according to European investment bank Credit Agricole CIB.

In its Asia Strategy outlook for 2012 dated January 16, Credit Agricole said that this year would be “challenging,” which could dampen growth of the Philippine gross domestic product (GDP) to about 3.5 percent from 4.4 percent last year before rebounding to 4.5 percent in 2013.

“First, weakening external demand will pressure the external position. Second, fixed asset investment growth is unlikely to be strong in an environment of global uncertainty, weakness in Europe, continued fragility in the US and a slowdown in China. Third, the accumulation of inventories in 2011 makes their contribution to growth likely to be

negative,” said a chapter on the Philippines written by Credit

Agricole economist Dariusz Kowalczyk.

Under such circumstances, Credit Agricole said it would be necessary for policymakers to stimulate the economy. Moreover, it said consumption would likely be supported by continued solid growth in remittances, which it expected to sustain a 5-percent growth, or lower than last year’s “but enough to sustain household spending.”

The investment bank sees the BSP cutting the reserve requirement on banks apart from slashing interest rates this year to help perk up the economy. It expects the BSP to bring down its overnight borrowing rate to 4 percent, suggesting another 25-basis point reduction from last week’s cut of the same magnitude.

Interest rate cuts will be driven by growth concerns, in turn made possible by slowing inflation, the investment bank said. After

peaking in October last year, Credit Agricole sees inflation softening to 3.5 percent this first quarter and averaging 3.5 percent for the full year compared with last year’s 4.7 percent.

“We also expect government spending to rebound,” the report said, noting that Philippine policymakers could afford a wider budget gap after they narrowed it to 1.1 percent of GDP by the third quarter of 2011 from 4 percent in mid-2010 and also pared down debt-to-GDP ratio to 56.1 percent from 62.4 percent at the end of 2009.

“This will prevent aggregate demand from slowing excessively. Swap rates and bond yields should decline, especially at the short-end, but the downside for longer tenors will be limited by bond issuance to the fund a widening fiscal gap,” the report explained.

On the foreign exchange markets, Credit Agricole predicted a challenging year for the peso. It projected a depreciation of the local currency to 45.30:$1 this first quarter on global risk aversion.

“It will also be pressured by a wider trade deficit and narrower current account surplus, and declining support from interest rates and growth differentials, as the economy slows and the BSP cuts rates,” the research said.

But beyond the first quarter, Credit Agricole sees a recovery of the peso in line with a likely improvement of sentiment in global markets, toward 42.50:$1 by the end of 2012.

For the global financial markets, the research said a “tumultuous” 2011 would be followed by a “difficult” 2012 as investors were seen battling through a multitude of uncertainties.

“Growth will slow further while risk aversion will remain elevated for some time to come as eurozone travails remain in the spotlight. Asian growth will still look far more impressive than elsewhere, with monetary easing set to provide support to regional economies,” it said.

After growth in emerging Asia slowed markedly in 2011 to about 7.5 percent from 9.2 percent in 2010, Credit Agricole said the region in general would decelerate this year.