‘Philippines economy losing steam’

Another foreign bank cuts growth forecast

MANILA, Philippines — The Philippine economy is losing steam much faster than anticipated, prompting another foreign bank to slash the country’s gross domestic product (GDP) growth forecast this year.

In its latest Asia Economic Outlook Q4 2023, ANZ said it has lowered its GDP growth projection for the Philippines to five percent, from 5.8 percent, for this year.

“The Q2 2023 outcome was weaker than anticipated and prospects are subdued. Private consumption growth should continue to moderate on the back of slower growth in remittances and an uninspiring pattern of job creation,” ANZ said.

It added that both the Philippine Statistics Authority (PSA) and World Bank have confirmed that the bulk of new job creation has been in agriculture and sales, both of which are low paying.

GDP growth slowed significantly to 4.3 percent in the second quarter from 6.4 percent in the first quarter of the year, bringing the average to 5.3 percent in the first half and way below the government’s six to seven percent target for 2023.

ANZ said the flow of funds data suggests households are dissaving and the only tangible support to household consumption has been credit.

“Consumption credit has been rising in double digits and is also reflected in sturdy auto sales and consumer goods imports. However, this support is unlikely to be sustained in the face of higher interest rates and tighter bank lending standards,” it said.

According to ANZ, the recent implementation of a new liquidity absorption tool by the Bangko Sentral ng Pilipinas (BSP) would only enhance the transmission of the increases in the policy rate to lending and deposit rates.

The BSP‘s Monetary Board raised interest rates by 425 basis points between May last year and March this year to tame inflation and stabilize the peso that slumped to an all-time low of 59 to $1 last October.

It maintained a hawkish pause for four straight rate-setting meetings in May, June, August and September amid the inflation downtrend and the stable local currency.

Inflation averaged 6.6 percent and stayed above the BSP’s two to four percent target range after quickening to 5.3 percent in August after easing for six straight months to 4.7 percent in July from a peak of 8.7 percent last January.

“The outlook for inflation has deteriorated, owing to the recent rise in food and energy prices. While the intensity of the emerging El Niño or the effectiveness of the recently imposed rice price ceiling are yet to be established, the momentum in headline CPI (consumer price index) suggests it will fall back into the central bank’s target range of two to four percent only in Q1 2024, compared with our earlier expectation of Q4 2023,” ANZ said.

ANZ sees inflation accelerating to six percent this year from 5.8 percent last year before easing to 3.5 percent for 2024 and three percent in 2025.

According to ANZ, the Monetary Board is likely to keep the benchmark interest rate at 6.25 percent until the end of next year

“Our view is that the BSP will hold the policy rate at 6.25 percent and that a cut is unlikely even in 2024,” it said. For 2025, ANZ expects the BSP to slash interest rates by 50 basis points.

ANZ pointed out that outlook for exports for the Philippines remains muddy.

“Our GDP growth forecasts for key markets for Philippines’ exports suggest weaker demand in 2024. Admittedly, the tech cycle is now reviving but the strength of the rebound is yet to be established. The competitiveness of the Philippines’ electronics industry is also debatable,” it said.

The Philippines managed to trim its trade deficit to $13.2 billion in the second quarter from $14.7 billion in the first quarter owing to weaker domestic demand and improving terms of trade.

“Unfortunately, the more recent surge in food and energy prices will complicate further progress. Food and energy account for 25 percent of the overall import bill,” it said.