Sharp slowdown in Philippines growth seen this year

MANILA, Philippines — The Philippine economy may not be able to sustain its robust growth and would in fact experience a sharp slowdown this year, global analysts said.

The research units of international credit agencies Moody’s and Fitch said the strong economic growth of the Philippines may wane this year.

At the same time, UK-based think tank Pantheon Macroeconomics said it expects the economy to expand at a much slower pace than last year’s, despite upgrading its 2023 growth forecast for the Philippines.

Sonia Zhu, associate economist at Moody’s Analytics, said Phiippine gross domestic product (GDP) growth is likely to slow down to 6.4 percent this year.

“A deteriorating global economy will be the biggest challenge facing the Philippines in 2023. A slowdown of the global economy will contribute to weaker export growth,” Zhu told The STAR.

The government on Thursday reported that GDP growth accelerated further to 7.6 percent in 2022, the fastest since the 8.8 percent expansion booked in 1976.

This exceeded the 6.5 to 7.5 percent GDP growth target penned by economic managers for 2022 despite a slower growth of 7.2 percent in the fourth quarter.

“The Philippine GDP growth slowed in the fourth quarter due to the high base effect from a year ago and moderating domestic consumption amid rising risks of  global economic downturn. The Philippines’ recent import growth had eased from its peak in 2022, reflecting a slowdown in domestic demand,” Zhu said.

The higher-than-expected GDP growth in the fourth quarter was achieved amid soaring inflation, prompting the Bangko Sentral ng Pilipinas (BSP) to aggressively hike rates to match the increases delivered by the hawkish US Federal Reserve point-by-point to maintain a healthy interest rate differential.

Inflation soared to 5.8 percent in 2022, breaching the BSP’s two to four percent target range, from 3.9 percent in 2021, after accelerating further to a 14-year high of 8.1 percent in December.

To tame inflation and stabilize the peso, the BSP raised key policy rates by 350 basis points, bringing the benchmark rate to a 14-year high of 5.50 percent from an all-time low of two percent.

According to Zhu, inflation is expected to peak in the first quarter , which could signal the end of the hawkish rate hike cycle by the BSP.

“Fiscal support will do the heavy lifting as the Philippines is one of the few countries in Asia Pacific that is extending the fiscal stimulus to 2023, which will help to boost growth, support domestic spending, and continue investment in legacy infrastructure programs,” Zhu said.

Fitch Solutions Country Risk & Industry Research said the economic strength of the Philippines is expected to wane this year with a slower GDP expansion of 5.9 percent.

“But we are holding on to our forecasts for growth to slow to 5.9 percent in 2023. High inflation alongside continued and significant monetary tightening is also likely to weigh on domestic economic activity in the coming quarters. The prospects for global demand remain tepid, which bodes poorly for the Philippines export outlook,” Fitch Solutions said.

The research arm of the Fitch Group said gross fixed investments was the main drag in the GDP growth after slowing sharply to 6.3 percent in the fourth quarter from 9.9 percent in the third quarter.

“This provides early evidence that the BSP’s aggressive monetary tightening cycle is already starting to weigh on investment prospects. Moreover, further rate hikes remain well on the cards,” Fitch Solutions said.

It noted that  the BSP’s business confidence index dipped to 31.3 percent in the fourth quarter from its peak of 59.7 percent in the first quarter of last year, implying that firms have turned more downbeat on the business outlook.

Fitch Solutions said the faster export growth of 14.6 percent in the fourth quarter from 13.4 percent in the third quarter is only temporary as the monthly trade data are already showing underlying signs of export sluggishness.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said the think tank has revised its 2023 GDP growth forecast for the Philippines to 4.5 percent. The latest growth forecast, however, was faster than the previous growth forecast of four percent.

“We continue to believe that the economy is in for a sharp slowdown in growth this year despite – and, in some ways, partly because of – its sustained outperformance in 2022,” he said.

Chanco said the resilience of households in face of the high inflation in 2022, however, is unlikely to be sustained this year.

“Consumers relied increasingly on debt to get by in the past 12 months, with growth in salary-based consumption loans – known more commonly as payday loans – surging to an all-time high of 67 percent year-over-year, as of November, the latest data,” Chanco said.

In addition, he said the boost in overseas Filipino workers’ remittances due to the peso’s depreciation seen last year is temporary.

While investments also contributed to the GDP growth in 2022, he said much of the expansion in business spending was seen in the first half of last year.

“The second half was a completely different proposition, with business spending stagnating, 16 percent below the pre-pandemic peak,” he said.

He said businesses are also hesitant to invest with the latest Bangko Sentral ng Pilipinas (BSP) business expectations survey showing only roughly 20 percent of firms have plans to expand in the first quarter, below the pre-pandemic optimism.

“Crucially, it will be much harder for the capex cycle to find any momentum this year, due to the 350-basis-point rate hikes by the BSP, the most aggressive tightening in the region,” he said.

For next year, he said the think tank expects the economy to grow by five percent, higher than its previous forecast of 4.5 percent.

The government has set a six to seven percent growth target for this year, and a 6.5 to eight percent growth goal for next year. – Louella Desiderio