How strong is the Philippine economy?
Earlier this month, the Philippine Statistics Authority had announced that third quarter gross domestic product (GDP) accelerated to 5.9 percent from 4.3 percent the previous quarter. Growth was also above the consensus estimate of 4.7 percent.
Still, the country’s economic performance was far from robust. Economic growth accelerated only because government spending rebounded, growing by 6.7 percent after falling by 7.1 percent in the second quarter. Consumer spending and exports of goods and services decelerated, while gross capital formation or investment spending contracted.
Consumer spending increased by a slower 5 percent during the period from 5.5 percent in the second quarter amid rising inflation. Prices of food and non-alcoholic beverages, which account for around a third of the consumption basket, increased sharply. Consequently, although the amount spent on food and non-alcoholic beverage increased by 7.9 percent in current prices, it only grew by 0.3 percent in real terms.
Meanwhile, exports of goods and services grew by only 2.6 percent, down from 4.4 percent. Although exports of services remained strong, growing by 11.7 percent, exports of goods fell for the third quarter in a row to 2.6 percent, as global economic growth weakened.
Gross capital formation also disappointed as it fell 1.6 percent after registering flat growth in the previous quarter. The drop was most likely due to the significant increase in interest rates, which discouraged capital expenditure. Note that commercial bank loan growth has been trending lower from a peak of 13.7 percent in December to 6.5 percent in September.
Notwithstanding the disappointing third quarter figures, there are reasons to be hopeful. October inflation slowed to 4.9 percent after accelerating in August and September. This, as food and oil prices went down on a sequential basis. The sharp decline in global oil prices and the strengthening of the peso recently should also help bring down inflation in the next few months.
The slower increase in inflation should be good for economic growth as it will enable consumers to spend more on non-essential goods and services.
Another good news is the US Fed’s recent decision to keep rates unchanged. The market is now expecting the Fed to begin cutting rates sooner rather than later. If this proves to be true, the Bangko Sentral ng Pilipinas (BSP) would be in a better position to turn dovish.
Note that the Fed’s aggressive rate hikes is one of the reasons why the BSP increased its policy rates by a total of 450 basis points since last year. Lower interest rates should encourage more businesses to borrow funds and pursue expansion plans, which in turn should help spur economic growth.
Finally, the government’s proposed 2024 budget is 9.5 percent higher compared to 2023. This should help boost government spending.
Nevertheless, risks remain. Inflation could still rebound as the country continues to be heavily dependent on imported food and fuel. Domestic food production remains highly vulnerable to poor weather conditions.
If inflation remains elevated because of high food prices, the BSP will stay restrictive and keep monetary policy tight even if the Fed decides to pivot.
The global economic growth outlook also remains poor. In fact, the growing weakness of the US economy is the main reason why the Fed stayed on hold during its last two meetings. Poor external environment should continue to weigh on the Philippines’ export growth in the next few quarters.
Finally, although the government plans to increase its pace in terms of spending next year, it might not have enough resources to do so.
This, as it projects GDP to increase rapidly, or by 6.5 percent to 8 percent, allowing it to collect more taxes. Moreover, the government expects to generate an additional P120 billion in revenues from new tax measures, P75 billion of which will come from junk food taxes and higher excise taxes on sweetened drinks.
The growth forecast is too aggressive (the consensus forecast is only 5.6 percent). Also, there is a strong likelihood that the junk food tax will not be passed anytime soon as it currently has no sponsor in Congress.
If the government fails to generate enough revenues, there is a risk that the budget deficit will exceed the target of 5.1 percent of GDP for 2024. This will not be viewed favorably by investors as it would hurt the government’s ability to reduce its level of indebtedness.
In summary, the economy is not that strong given the abundance of headwinds and risks. I am hopeful, however, that the government will take proactive measures to address the problems that are within its control to improve the resilience of the local economy over the longer term. INQ