Capital Economics: PH to remain among fastest-growing economies in Asia

MANILA, Philippines – Even as its first-quarter gross domestic product (GDP) expansion fell to a four-year low due to delayed budget implementation, the Philippines is still expected to be among the fastest-growing economies in Asia amid slowing regional growth, London-based Capital Economics said.

In its Emerging Asia Economic Outlook report for the third quarter, Capital Economics said it expects growth across the region “to remain weak this year, with many countries set to grow at their slowest pace in a decade.”

“In aggregate terms, we think GDP growth in emerging Asia will slow from 5.5 percent last year to 5 percent in 2019 and 2020,” Capital Economics said, mainly blaming cooling global demand amid a trade war mainly between China and the US.

The Philippines will nonetheless buck this trend and post GDP growth of “around 6 percent over the next couple of years,” Capital Economics said.

Specifically, it sees Philippine economic growth at 6 percent this year and next year before climbing to 6.5 percent in 2021.

The government targets 6-7 percent growth this year and 6.5-7.5 percent next year.

The economy grew by a three-year low of 6.2 percent in 2018, but still faster than the average of 5.7 percent between 2008 and 2017.

While the delayed passage of the P3.7-trillion national budget impacted on first-quarter growth, “government spending has subsequently rebounded” after President Duterte approved this year’s appropriations on April 15.

“Stronger government spending should lead to an acceleration in growth over the coming quarters,” Capital Economics said.

The government underspent P1 billion a day on public goods and services between January and April as it used reenacted 2018 funds.

For Capital Economics, the victory of most of President Duterte’s allies in Congress and easing inflation were expected to support sustained robust economic growth in the near term.

“The strong performance by supporters of President Duterte in the recent midterm elections means the government should have fewer problems getting the budget through Congress in the future. Under the government’s current plans, infrastructure spending should increase from an estimated 4.9 percent of GDP in 2018, to 6.4 percent of GDP in 2021,” it said.

“Meanwhile, consumer spending growth is set to accelerate on the back of falling inflation. Inflation has dropped back sharply since late 2018 and is likely to decline further over the coming months. Our forecast is for inflation to average just 1.5 percent in the second half of this year. This is under the Bangko Sentral ng Pilipinas’ 2- 4 percent target range” for 2019, it added.

However, Capital Economics considers the ballooning current account deficit as the “key risk” to the Philippine economy as it would further weaken the peso.

“We expect the current account to deteriorate further over the coming quarters. Import demand is likely to remain strong due to an increase in demand for raw materials and capital goods, while exports should remain lackluster in the face of weak external demand,” Capital Economics said.

“The worsening current account position is likely to make the peso vulnerable to sudden shifts in global risk appetite. Our forecast is for the peso to reach 55 to the US dollar by end-2019,” Capital Economics added.

With regards the Duterte administration, Capital Economics noted of both good reforms and political noise seen to impact on investor sentiment.

“In terms of the political situation, Duterte has introduced a number of useful reforms, including changes to the tax system as well as the big increase in infrastructure spending. However, these changes are being undermined by the President’s increasingly autocratic tendencies, including his willingness to undermine political institutions and attack his opponents, which have caused foreign investors to take fright,” according to Capital Economics.