Citi sees BSP raising key rates twice in 2018

The Philippine economy will likely expand by 6.9 percent this year, faster than the pace seen by market consensus, with investments becoming a more significant growth engine alongside a still-benign global economic environment, a top economist from American banking giant Citi said.

Citi also sees the Bangko Sentral ng Pilipinas raising key interest rates twice this year, for a total of 50 basis points, to curb rising inflation. The first hike of 25 basis points is seen to come during the BSP’s next policy-rate setting on May 10.

Citi’s 6.9-percent gross domestic product (GDP) growth forecast for the Philippines this year will mark an acceleration from last year’s actual growth of 6.7 percent. It is also better than the consensus market forecast of 6.6 percent.

“We think (that) growth in terms of investment story has more traction,” Hong Kong-based Johanna Chua, Citi managing director and head of Asia economics research, said in a briefing yesterday.

The government’s fiscal spending has accelerated alongside the execution of more private sector projects, Chua noted. At the same time, the weaker local currency is seen as a stimulant, given that the higher dollar-to-peso conversion boosts the purchasing power of households supported by overseas Filipinos and also increases the income of dollar-earning industries like exporters and business process outsourcing firms.

Citi’s outlook also assumes that the global economy would remain good, the US-China trade war will not escalate and that the US dollar won’t appreciate too sharply. “If the dollar ends up being stronger than expected, it will have a huge impact on capital flows on EM (emerging markets) as a whole which will have a knock-on effects on the region,” she said.

While accelerating fiscal spending, Chua noted that the government was still maintaining the discipline of sticking to deficit limits. Citi expects government deficit to reach 2.8 percent of GDP this year and 3 percent next year.

On inflation, Citi sees the inflation peaking this second quarter of the year and averaging at 4.5 percent for the full year, higher than the consensus forecast of 4.2 percent. But by next year, Citi expects inflation to ease to an average of 3.2 percent versus the consensus of 3.6 percent.

“We’re closer to the BSP’s view that we have a transitory inflation spike,” she said, referring to the adjustments arising from the recent tax reform program that simplified and lowered individual income taxes but increased excise taxes on oil and automobiles and introduced excise taxes on sugared beverages.

In the case of the Philippines, she said inflation had surprised on the upside for eight months in a row and could no longer maintain the same level of monetary accommodation.