Fitch Unit revises upward 2018 Philippines growth forecast

MANILA, Philippines - Economic growth is likely to fall below the Duterte administration’s target over the next two years, albeit still at a “respectable” level, with investors expected to step back and unable to match the government’s pump priming plan.

Expansion is seen at 6.3 percent this year and the next, below the official government goal of 6.5 to 7.5 percent for 2017 and seven- to eight-percent in 2018, BMI Research has said.

This, the research arm of Fitch Group, said is still “optimistic.”

“We hold an optimistic view on the Philippine economy over the medium term, and we have upgraded our 2018 growth forecast to 6.3 percent, from 6.1 percent previously,” BMI said.

“(We) expect growth to average a respectable 6.2 percent per annum in the next five years,” it added.

Following a faster 6.5-percent second quarter growth, BMI said it sees the economy underperforming as suggested by the recent weakness in the financial markets, which gauge investor sentiment going forward.

The peso, for instance, has weakened to near 11-year lows, closing at 50.49 to a dollar last Friday. A weak peso indicates more foreign funds are leaving than entering the country.

Despite expected private sector weakness, BMI said government spending should cushion the economy going forward. Part of this include an ambitious plan to spend up to P8 trillion in infrastructure up to 2022.

“Over the coming quarters, we expect government consumption growth to remain strong, a reflection of the administration’s plan to increase education, healthcare, and police spending,” it said.

The expansionary fiscal plan will be backed by tax reform efforts meant to boost disposable incomes and drive consumption and investment, and generate more revenues. The first of the five tax reform bills is being deliberated at the Senate and targeted to be passed in October.

Over the next five years, BMI said above-six percent growth will be supported by the young population with increased purchasing power.

“The Philippines has long suffered from a relatively low savings rate (compared to the Asia region), in part due to demographics factor,” it said.

“But as the working age population rises over the coming years, this should support overall savings relative to GDP and raise the potential for investment going forward,” it added.

BMI Research explained the Philippines has made considerable improvements in its business environment under the former Aquino administration as seen by advancements in the Index of Economic Freedom compiled by the Heritage foundation and the Ease of Doing Business Index by the World Bank.

“The momentum looks likely to continue under the current Duterte administration which is prioritizing tax reforms and policies to enhance competitiveness as well as ease of doing business under the 10-point socioeconomic agenda,” BMI said.

It also cited the deepening economic cooperation with China and Japan under the Duterte administration would also provide a tailwind for investment and trade over the coming years.

The research arm said downside risks to its growth outlook include the political infighting between the ruling PDP-Laban and rival Liberal Party, the insurgency in Southern Philippines and prolonged martial law, President Duterte’s obsession with the war on drugs, allegations of human rights violations, and unpredictable temperament as well as US President Donald Trump’s protectionist rhetoric.