Politics seen as major risk to long-term growth

Although growth is projected to be sustained in the next six years, London-based consultancy firm Capital Economics sees politics as the “main” risk to the Philippine economy.

“Risks have increased in the Philippines following the election of President Duterte (last year). The economic impact, however, is more likely to be felt in the long  run, and growth should remain strong over the short to medium term,” Capital Economics said in its emerging Asia economic outlook report for the first quarter of 2017.

“Despite (or perhaps because of) a controversial war on drugs at home, Duterte remains hugely popular in the Philippines. Recent opinion polls, for example, have given him approval ratings of above 80 percent. With sentiment strong at home, private consumption, which accounts for about two-thirds of GDP (gross domestic product) is likely to hold up well over the near term. We expect growth to remain strong over the next couple of years,” Capital Economics noted.

It expects Philippine GDP to grow 6.5 percent this year and 6 percent next year. The government targets 6.5-7.5 percent growth in 2017 before rising to a range of 7-8 percent from 2018 to 2022.

Capital Economics said it had remained “sanguine” about the short- and medium-term growth outlooks amid the economy’s “healthy fundamentals.”

“Low debt levels and a current account surplus mean the country is well-positioned to weather any negative shift in investor sentiment. Duterte’s decision to delegate matters of economic policymaking to his respected finance minister, Carlos Dominguez, which should reduce the risk of a sudden shift in economic policymaking, also helps,” Capital Economics said.

“Healthy demographics and a booming business outsourcing sector are also reasons to be positive about medium-term prospects,” it added.

“Monetary policy is likely to be much less eventful,” Capital Economics said, citing the low inflation environment that should allow the Bangko Sentral ng Pilipinas to “be in little hurry to raise interest rates from their current low of 3 percent.”

Inflation averaged 1.8 percent in 2016, below the government’s 2-4 percent target. Inflation is expected by the BSP to hit about 3 percent this year, still within the target range.

However, Capital Economics said it was concerned on Duterte’s “increasingly erratic and crass leadership style, which could hold back long-run growth prospects.”

“So far, Duterte’s controversial statements and policy changes have centered on foreign policy and law and order issues, but calling the president of the US ‘the son of a whore’ and abandoning the country’s long-standing security alliance with the US is unnerving investors which will make them think twice before committing to long-term investments in the country,” Capital Economics said.

“A lower investment rate will reduce the productive potential of the country,” it warned.

Capital Economics noted that “one of the key achievements of Duterte’s predecessor, Benigno Aquino, was pushing through improvements in the business environment, which has helped to trigger an acceleration in investment growth.”

The reforms introduced by Aquino had “helped lift the country’s low investment rate, which has been the Achilles heel of the economy for a long time.”