Economy seen robust despite growth downgrade

MANILA, Philippines - The Philippine economy will remain robust this year despite the downgraded growth forecasts by the World Bank and the Asian Development Bank, among others, the latest Capital Market Research of First Metro Investment Corp. (FMIC) said.

The study, jointly undertaken by FMIC and University of Asia and the Pacific, said “there are no signs that the economy is veering away from the high growth path it has taken since 2012.”

“Domestic demand keeps a robust growth due to the peso depreciation’s positive effect on OFW remittances and exporters’ revenues that are boosting consumer spending, apart from the unrelenting government spending on infrastructure,” it said.

FMIC said it is expected that the reconstruction work in Eastern Visayas may start in earnest only in the second quarter, since detailed plans and logistics were being finalized in first quarter.

According to FMIC, the rise in inflation for the months of December and January are temporary.

“The jump in inflation that we have seen in December and January appears to be temporary blips due to supply shortages related to the aftermath of Super Typhoon Yolanda’s devastation and the government’s overoptimism in rice output in fourth quarter of  2013,” it noted.

The FMIC study said headline inflation is likely to average 4.2 percent in the first quarter and ease slightly in the second and third quarters, as rice imports actually reach the hands of consumers and world crude oil prices finally succumb to weak global demand and higher non-OPEC production,” it said.

It is also expected that interest rates have eased from the initial uptick caused by the local reaction to the actual implementation of the US Federal Reserve’s tapering program.

“This was not due to the high M3 (domestic liquidity) growth up to December 2013, which we have previously explained as having slight impact on actual liquidity. Rates will have a downward bias unto Q2, but with a little more volatility due to external developments,” it said.

FMIC said it does not expect any rate adjustment from the Bangko Sentral ng Pilipinas in the first six months of the year.

“With inflation keeping within the mid-point of the BSP’s inflation target, with minimal upward pressures in the horizon, we do not see any form of tightening by the BSP in H1,” it said.

Meanwhile, the research also showed that external demand is expected to remain strong.

“As our empirical studies suggest that it takes up to six months before exports permanently respond positively to a peso depreciation. Note that the peso started depreciating in H2 2013. In addition, we have better income growth in the developed markets (DMs) which is even a stronger positive driver of exports,” it said.

“The continuing gains of the US economy and the wider differential between Philippine inflation and US inflation rates, as well as technical indicators, enable us to maintain our basic outlook that the peso will have a depreciation bias, albeit at a slower pace than that seen since H2 2014,” it added.