Economy grows 7.8% in Q1

MANILA, Philippines - The Philippines posted surprisingly strong growth in the first quarter of the year, driven by robust domestic consumption and government spending, knocking China from pole position in Asia.

The stellar pace of expansion, which blew past expectations, pulled the peso up from an 11-month low and cemented views the central bank would leave its key policy rate on hold this year.

Growth is seen powering on after the Philippines earlier this month got an investment grade rating from Standard & Poor’s, the second debt agency to do so this year.

That lowers borrowing costs and helps to attract foreign capital for an economy mired in high unemployment and poverty.

From a year earlier, the economy grew 7.8 percent, helped by robust domestic spending, making the Philippines the fastest growing economy in Asia as it pushed past China’s 7.7 percent annual pace and 1.6 percent quarterly growth.

First quarter GDP grew a seasonally adjusted 2.2 percent over the prior three months, the fastest clip since the first quarter of 2012. A Reuters poll of economists had forecast 1.6 percent growth.

The Philippines’ year-on-year GDP figure also topped the 6.1 percent growth forecast in a Reuters poll and was the fastest since the second quarter of 2010, then boosted by spending related to national elections that put President Aquino in power.

“We may now be moving along a new growth trajectory,” socioeconomic planning chief Arsenio Balisacan said.

“We have been aggressively addressing the infrastructure bottleneck, as evidenced in the 45.6-percent increase in public construction. Adjusting for its magnitude, the contribution to growth of private construction is at least three times that of public construction,” Balisacan said in a press briefing.

“Despite the contraction of 8.4 percent in goods exports, local manufacturing grew at an impressive rate of 9.7 percent, on strong domestic demand,” said Balisacan, who is also director general of the National Economic and Development Authority. 

Capital formation jumped an annual 47.7 percent in the first quarter as the private sector invested heavily to expand capacity given strong domestic consumption.

Public construction climbed 45.6 percent as a faster budget roll-out and better fiscal position allowed for more spending to rehabilitate decrepit school buildings, roads and bridges.

Per capita GDP grew an annual 6.1 percent in the first quarter, the highest in at least two years, although unemployment was at a year-high of 7.1 percent as of March.

With a fast-growing population, estimated at 96.8 million as of March, job creation can’t keep pace with the estimated one million new entrants to the job market every year, Balisacan said.

The challenge was to create more broad-based growth so that the poorer sectors of society could benefit from jobs in high growth sectors, he added.

Good governance

At Malacañang, deputy presidential spokesperson Abigail Valte said “growth was felt in almost all sectors, most notably in local manufacturing, which grew by 9.7 percent” and that “continuation of government public expenditures was also key, increasing by 13.2 percent.” 

“Without doubt, the confidence of both investors and consumers remains strong, as economic activity accelerates even in an uncertain global economic climate,” she said.

“By expenditure, capital formation likewise grew by 47.7 percent,” she said. “More than economic growth, however, the Aquino administration is focused on fostering inclusive growth. Since our administration took office, we have worked to drastically expand social safety nets to help the most vulnerable in our country,” she said.

Finance Secretary Cesar Purisima said the latest growth data proved that “good governance is good economics.”  

“After one of our strongest years of growth in recent history, we are happy to note that our first quarter growth of 7.8 percent has exceeded all but the highest forecast and projections and well above the country’s growth trend,” Purisima said. “Fiscal space from a robust growth in our revenue collections drove a substantial expansion in government expenditures (13.2 percent) and public construction (45.6 percent),” he said.

With higher revenue collections, he said the government was able to spend generously for growth while keeping the budget deficit in check. This, coupled with private spending, showed “that we are increasing the productive capacity of the economy, laying the foundations for sustained growth in the future,” Purisima said in a statement.

“It is also interesting to note that the remarkable growth during the first quarter came despite contractions in mining and exports. This should be a cause for optimism,” the finance chief said.

“As the global economy shows signs of recovery, we expect exports to pick up, and with the coming finalization of rules governing the mining sector we expect to unlock another highly potent growth driver,” he pointed out.

“I am confident we are capable of so much more, and the Department of Finance remains committed to empowering a strong Philippine economy through efficient revenue creation, fiscal sustainability, and the creation of a beneficial and competitive business environment for all our partners.”

The export-reliant Philippines is facing some risk that demand for its high-tech products will slow on more evidence that the recovery in global growth is losing momentum. 

But the global slowdown had little impact on manufacturing, which grew an annual 9.7 percent in the first quarter on domestic demand for food items, household appliances, chemicals, and communication, transport and machinery equipment.

Mixed reactions

Market reaction was mixed. While the peso was up at P42.28 per dollar, the local stock market slid as much as 3.4 percent in line with sharp declines in regional bourses.

At a time when several regional central banks have cut rates to bolster growth, economists said the Bangko Sentral ng Pilipinas (BSP) would most likely leave its key overnight borrowing rate on hold for the rest of the year.

Inflation is forecast to stay within the BSP’s three percent to five percent target band this year despite strong growth.

BSP Governor Amando Tetangco said he did not foresee the inflation target being breached over the policy horizon despite strong GDP growth.

The central bank next meets to review policy on June 13. It has kept its policy rate steady at a record low of 3.5 percent since December 2012, but has slashed the rate on its special deposit account (SDA) facility by more than 200 basis points since July 2012 to divert credit to more productive use.

“We think the BSP will continue to cut the SDA rate to lift domestic spending as well as save costs,” said Trinh Nguyen, economist at HSBC in Hong Kong.

The BSP has incurred heavy losses as the SDA facility attracted huge liquidity.

With the outlook on exports still murky, domestic consumption will remain as the main driver for economic growth this year.

Manila is targeting growth of 6 percent to 7 percent in 2013 after an upwardly revised 6.8 percent expansion the prior year.