External risks a heavier drag on Philippine growth – S&P

Change in administration unlikely to impact significantly

MANILA, Philippines – S&P Global Ratings said external factors led by the slowdown in China, market volatility due to US Fed action on interest rates, as well as the referendum on the exit of the United Kingdom from the European Union are expected to create a heavier drag on Philippine growth.

In a report, S&P said economic growth is expected to remain strong, expanding between six and 6.5 percent this year despite the change in administration. For next year, the economy is expected to grow 6.3 percent.

“Economic policy looks unlikely to change significantly with the incoming president, so underlying demographic trends will continue to drive six to 6.5 percent growth,” the report said. 

S&P said a growing and educated middle class continues to be absorbed by a combination of overseas employment and a booming outsourcing industry, driving consumption and investment even as external demand remains weak. 

The country’s GDP growth accelerated to 6.9 percent in the first quarter, making the Philippines the fastest growing economy in Asia from the revised 6.5 percent in the fourth quarter of last year. 

Economic managers penciled a GDP growth of 6.8 to 7.8 percent this year after easing to 5.9 percent last year from 6.1 percent in 2014 due to weak global growth and lack of government spending. 

S&P said external factors from the real and financial sectors are the country’s biggest growth risks.  

On the real side, S&P said Philippine exports are fairly exposed to China’s investment-led slowdown due to capital goods being a relatively big share of its exports to China.  

On the financial side, S&P said market turbulence from events such as a Brexit vote could significantly dampen investor confidence. 

S&P sees inflation picking up to 2.5 percent this year and to 3.3 percent next year after easing to 1.4 percent last year from 4.1 percent in 2014 due to stable food prices and cheaper utility rates. 

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr., earlier said the decision of the US Federal Reserve to keep interest rates steady gave the central bank more leeway to maintain the country’s current monetary policy stance. 

Tetangco said the decision of the US Fed to keep rates unchanged but hinted of two possible rate hikes this year as well as the referendum on the membership of the United Kingdom in the European Union would be taken into consideration during the policy-setting meeting of the Monetary Board on June 23. 

“The Fed standing pat on rates was expected by the market. But that the policy path chart reflected a more dovish stance was new. The FOMC also continued to be mindful of external developments such as the Brexit. These may give some more room for emerging market economies, including in the Philippines, to remain supported,” he said. 

The BSP’ has kept interest rates unchanged for 13 straight policy-setting meetings since October 2014 due to robust domestic demand and the benign inflation environment. 

Last June 3, the BSP adjusted key policy rates as part of the shift to the IRC framework.