HSBC economist Trinh Nguyen: BSP likely hold rates steady PHOTO FROM HSBC.COM
MANILA, Philippines—The Philippines’ 5.9 percent second-quarter GDP growth, which exceeded the 5.5 percent consensus forecast for the period, is seen prompting the Bangko Sentral ng Pilipinas to maintain its key interest rate at current record-low levels during its next monetary setting this September.
In a research report, HSBC economist Trinh Nguyen said the growth rate “did not disappoint, reflecting strong domestic demand that was supported by robust fiscal spending, resilient remittances and record-low interest rates.”
Net exports likewise contributed to growth, Nguyen said, thanks to the expansion of services.
“With inflation likely to increase significantly in the coming months due to higher transportation costs, short-term food supply shocks and strong domestic demand, the BSP will likely hold rates steady at 3.75 percent (overnight borrowing) to buy more time for monitoring price and external conditions,” Nguyen said.
Stock brokerage DA Market Securities agreed that interest rate cuts by the BSP “may take a backseat as economic growth is sustained.”
“With Philippine expansion better than expected at 5.9 percent, we expect that corrections in the market will be buy opportunities for 2013,” the brokerage added.
The main-share Philippine Stock Exchange index shed 46.41 points, or 0.89 percent, to close at 5,149.31 after the GDP performance was announced, ending a two-day run-up ahead of the second-quarter GDP report. Although the figure was better than market consensus, it was not enough to lift the market’s mood alongside a sluggish regional sentiment.
HSBC’s Nguyen said the Philippines has remained “resilient against global headwinds due to both timely fiscal and monetary policy as well as the fundamental structure of its economy.”
“Despite slowing remittances, private consumption accelerated as a result of accommodative monetary policy—interest rates were at a record low. The business process outsourcing (BPO) sector also helped keep exports of goods and services growing, as many firms in developed economies are turning to the Philippines’ top-ranked voice service to reduce costs. All these factors enabled the country’s growth to accelerate in the first semester,” she said.
The HSBC economist, however, warned that strong domestic demand would likely fuel inflationary pressures in the months ahead. Already, Nguyen said core inflation had risen above headline inflation at 4.1 percent year on year in July (versus headline at 3.2 percent year on year).
“With the recent domestic oil price hikes and short-term food supply shocks, headline inflation will likely rise significantly in the months ahead. While August headline inflation will likely stay on target (HSBC’s forecast is 3.7 percent year on year), the room for a cut has narrowed,” she said.
But according to Jose Mari Lacson, head of research at stock brokerage Campos Lanuza & Co., the 5.9 percent GDP growth seemed weak considering the positive effect of a low base in 2011.
“Given the relaxed monetary policy in the first quarter of 2012 and rapid credit growth, you would expect some boost in economic activity in second quarter—yet we see a slowdown,” Lacson said.
“Accelerated government spending is clearly helping to support economic growth via public construction but there are some fundamental areas that government policy needs to address. The mining sector is contracting on lower metal prices and probably the suspected gold smuggling. The new mining EO won’t help competitiveness of that sector,” Lacson said.
Lacson said the rapid appreciation of the peso in the second quarter may have weakened the competitiveness of the manufacturing sector as well as the purchasing power of families dependent on OFW remittances. This could be why retail spending and personal consumption growth decelerated, he said. “The BSP is managing the strong peso issue but it’s the volatility that kills growth,” he said.
“What we can conclude from the results is that despite being at the high-end of the government’s target range, the slowdown in 2Q GDP growth reflects our economic vulnerabilities,” he said.