Goldman Sachs raises RP economic growth forecast

GOLDMAN Sachs said the Philippine economy would grow faster than its previous forecast because of stable remittances, substantial monetary stimulus and a manageable fiscal deficit. In a research note, the US investment bank said monetary policy would remain stable until the second half of next year, during which it expects the Bangko Sentral ng Pilipinas (BSP) to hike its interest rates by 50 basis points.

Goldman Sachs said the Philippines’ gross domestic product (GDP) growth would reach 1.6 percent this year, better than its previous forecast of 0.5 percent.

For next year, it also revised upwards its forecast to 4.2 percent, from the previous projection of 3.7 percent.

An indicator of economic performance, GDP is the amount of goods and services produced in a country.

“We think the Philippines’ growth recovery is on a firm footing. Overseas Filipino workers’ [OFW] remittances, the fiscal stimulus and an accommodative monetary policy are likely to be supportive of growth over the rest of 2009 and 2010, as well as a likely return of the Filipino consumer who had switched to a precautionary savings mode,” Pranjul Bhandari, Goldman Sachs economist, said.

The government projected GDP to grow between 0.8 percent and 1.8 percent this year. As of the first half, growth averaged 1 percent after the unexpected 1.5-percent expansion in the second quarter from 0.6 percent in the first quarter.

As the global economy is improving, Bhandari said remittances would remain resilient, projecting growth of 11 percent year-on-year by December this year and by 12 percent next year. Remittances continued to grow so far this year, accelerating by an unexpected 9.3 percent in July.

The large chunk of workers in the fast growing services sectors has helped in holding up remittance inflows through the crisis. The deployment of nurses, domestic helpers and caregivers are more stable given demand spurred by aging populations in the developed world and shortages of healthcare and other service workers in the Middle East.

The bulk of the OFWs come from the US and the Middle East, accounting for 32 percent and 25 percent, respectively, in 2007.

Goldman Sachs said that money sent home by OFWs employed in the Middle East are linked to oil prices, which are expected to average $85 per barrel by the end of the year and to $90 per barrel next year, after dipping to $35 per barrel during the crisis. The investment bank expects the region to grow by 3 percent to 5 percent next year.

Goldman Sachs said Philippine government spending on infrastructure is set to increase to 2.7 percent of GDP this year from 2.2 percent in 2007.

Amid higher government spending, Goldman Sachs expects the fiscal deficit to worsen to 3.5 percent of GDP this year, or higher than the ceiling of 3.2 percent, from 0.9 percent in 2008. Due to higher spending and slower tax collection, the budget deficit hit P210 billion at end-August, or P40 billion shy of the full-year program of P250 billion.

The investment bank sees inflation moving higher from an average of 3.3 percent this year to an average of 3.7 percent next year with the demand recovery and uptick in commodity prices. Inflation dipped to 0.1 percent in August from 0.2 percent in July.

As inflation remains manageable, Goldman Sachs expects the BSP to keep its policy rates steady for the rest of the year, providing an appropriate monetary stance conducive to growth.

The BSP’s overnight borrowing and lending stands at record lows of 4 percent and 6 percent, respectively, after it reduced them by 200 basis points since December last year.

“The BSP’s assessment of a fair balance between growth and inflation at present is in line with our forecasts. We expect BSP to start by hiking rates by 50 basis points in the second half next year. Further rate hikes in 2011 will depend on the trajectory of inflation,” Goldman Sachs said. –Maricel E. Burgonio, Senior Reporter, Manila Times