Bankers foresee sustained economic expansion despite changing of the guards in Malacañang

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP), multilateral lender International Monetary Fund (IMF) and investment banks see sustained economic growth under the Duterte administration.  

“Our economy remains on track as the new administration under President Rodrigo Duterte sets its priorities to achieve growth and a better life for our people,” BSP Governor Amando Tetangco Jr., said.

He cited the Philippines uninterrupted economic growth for 69 quarters with gross domestic product (GDP) growth averaging five percent since 1999.

Tetangco said there are indications growth is getting more broad-based.

However, he pointed out the country continues to face external headwinds brought about by the normalization of interest rates in the US, slowdown in China, and the decision of the United Kingdom to leave the European Union (Brexit).

“Moving forward, we see potential risks that can elevate volatility and challenge our policymaking. Nevertheless, our domestic sources of resilience will help us manage possible spillovers from global challenges such as weak and fragile growth, geo-political tensions, continuing uncertainty over US Fed interest rates and Brexit,” Tetangco said.

Economic managers of the Duterte administration expect the economy growing between six and seven percent, lower than the previous target of 6.8 to 7.8 percent, as it intends to ramp up infrastructure spending resulting in a higher budget deficit ceiling of three percent of GDP instead of two percent of GDP.

For his part, BSP Deputy Governor Diwa Guinigundo said an annual seven to eight percent GDP growth for the Philippines is “doable” despite the changing of the guards in Malacañang.

“We expect the economy to continue to be stable and the macroeconomy to continue to attract the confidence of the markets,” Guinigundo said.

Chikahisa Sumi, head of the IMF mission to the Philippines, said the Philippines could post a GDP growth range of seven to eight percent instead of six to seven percent over the medium term with the 10-point agenda outlined by the Duterte administration.

Sumi said the reform agenda would anchor policy formulation and structural transformation over the medium-term.

The IMF, he said, is supporting the increase in the budget deficit to three percent of GDP over the medium term, consistent with a broadly stable debt-to-GDP ratio.

The multilateral lending is pushing a comprehensive and equitable tax reform package that raises substantial additional revenue to finance higher productive spending that would crowd in private investment.

 “This additional effort scenario would make the Philippines one of the fastest growing (if not the fastest) economies in the world and help reduce poverty toward the government’s ambitious target,” Sumi said.

Credit rating intact

Guinigundo said the Philippines is expected to keep, if not improve further, its investment grade credit ratings over the medium term under the Duterte administration.

“The Philippines is in an interesting period (given the political leadership transition), but rest assured that we do not intend to reverse the gains we achieved so far in relation to credit ratings,” he said.

Guinigundo said  the strong macroeconomic fundamentals and positive structural reforms implemented over the years would help the Philippines maintain its creditworthiness.

The Investor Relations Office (IRO) said the Philippines used to suffer from stubborn speculative credit ratings from almost all international rating agencies.

However, Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings finally assigned the Philippines the minimum investment grade in 2013 on the back of the country’s much improved macroeconomic fundamentals.

This milestone was followed by succeeding credit-rating upgrades in the following years, making the Philippines the most upgraded sovereign in the world over the last three years.

Both Moody’s and S&P have upgraded the country’s rating to a notch above investment grade.

Investment banks bullish on Phl

JP Morgan said both the financial and equities market welcomed the economic agenda of the Duterte administration.

“We believe financial markets will welcome the explicit commitment of the Duterte administration in keeping the current macro-economic policies, particularly its focus on infrastructure,” the investment bank said.

President Duterte vowed to continue and improve the economic reforms of the former administration.

“The absence of any drastic shifts is encouraging, in our view. The focus on grassroots development is also laudable, as inclusive growth has been a persistent problem of the economy. It also helps that the new government is cognizant of the need to maintain fiscal discipline despite its goal of making income tax more progressive,” it added.

According to the investment bank, the plan helped somewhat address concerns about Duterte’s lack of clarity on his economic platform.

 “However, given the broad pronouncements, the appointment of a capable and experienced Cabinet and economic team, and eventually, the ability to execute, are the next milestones to watch for,” JP Morgan said.

Joseph Incalcaterra, economist at the Hongkong and Shanghai Banking Corp. Ltd. (HSBC), said the investment bank has raised the country’s GDP growth target to 6.3 percent for this year and next year amid the renewed optimism under the Duterte administration.

This was higher than this year’s 5.9 percent and next year’s 5.8 percent.

Incalcaterra cited the present administration’s plan to raise the budget deficit ceiling to three percent of GDP instead of two percent.

 “The three percent deficit will be reached by a further increase in infrastructure spending and tackling underspending. The target will also likely be achieved thanks to income and corporate tax cuts, which will be only partly offset by plans for increased tax enforcement,” he said.

The country’s GDP growth eased to 5.9 percent last year from 6.1 percent in 2014 due to weak global demand  and low government spending.

In the first quarter, the growth accelerated to 6.9 percent from the revised 6.5 percent in the fourth quarter due to robust private consumption and improving government spending.

ING Bank Manila senior economist Joey Cuyegkeng also said the Dutch financial giant also raised the GDP growth forecast for the Philippines to 6.5 percent instead of 6.2 percent this year and to 6.2 percent instead of a little over six percent next year.

“We have upgraded our 2016 and 2017 growth forecasts on the back of higher deficit spending but still relatively affordable financing costs for the private sector while consumer spending remains buoyant with structural inflow growing at an average growth of nine percent this year and next year,” he said.

Cuyegkeng pointed out the economy likely accelerated in the second quarter due to election related spending and is expected to average six percent in the second half of the year.

 “We anticipate that higher consumers’ incomes and purchasing power and higher government spending would keep growth at above six percent in 2017. Improvement in agriculture output in 2017 would present some upside possibilities,” he added.