Leading indicator points to slow economic recovery

THE Philippine economy may go through a ”slow recovery” in the third quarter, according to the National Statistical Coordination Board (NSCB), as its composite leading economic index (LEI) slid further into negative territory. Citing a moderate decline in its LEI, the agency said the indicator slipped to negative 0.425 in the third quarter from a revised negative 0.312 in the second quarter of the year.

”Although the LEI is still in the negative territory, its slope has tapered compared to its movement in the past quarters, suggesting that the impact of [the] global crisis may have bottomed out,” the NSCB said.

The agency said the LEI slope remained at negative 0.113 in the third quarter, better than the 0.136 contraction in the second quarter of the year.

The LEI serves as a basis for short-term forecasting of macroeconomic activity, as it incorporates the behavior of indicators that consistently move upward or downward before the actual expansion or contraction of the economy.

The NSCB said the moderate drop in the LEI is “an indication that the Philippine economy may be on its way to a slow recovery from the crisis that gripped the global economy starting in late 2008.”

The positive contributors to LEI were wholesale price index, consumer price index, electric energy consumption, and tourist arrivals. The positive contributors accounted for only 32 percent of the index.

The negative contributors included the stock price index, hotel occupancy rate, money supply, total merchandise imports, foreign exchange rate, terms of trade index, and number of new businesses. The negative contributors still outweighed the positive contributors, as the former accounted for 68 percent

The NSCB said the effect of Typhoon Ondoy was not factored into the computation of the third quarter LEI since the data used in the estimation were collected and analyzed days before the tropical storm struck the country.

The National Economic and Development Authority earlier said the country’s economic growth target may be cut to a range of 0.7 percent to 1.7 percent this year because of Ondoy.

The government had said the economy, as measured by the country’s gross domestic product (GDP) would grow between 0.8 percent and 1.8 percent this year.

A key economic indicator, GDP is the value of all final goods and services produced in the country.

In the first half, GDP grew by 1 percent, lower than the 4-percent expansion in the same period last year.

Stanchart raises RP forecast

In a report, Standard and Chartered Bank (SCB) raised its economic growth forecast for the Philippines, citing the country’s fiscal and monetary stimulus, as well as strong remittances, which it said will strengthen the peso against the US dollar.

SCB said the country’s GDP would expand by 1.5 percent this year and 3.3 percent next year. This is higher than its earlier projection of 0.7 percent and 2.7 percent, respectively. SCB’s forecast however is within the government’s target range.

“We have raised our forecasts for Philippine GDP growth due to stronger than expected overseas Filipino workers’ (OFW) remittances and continued plans for strong fiscal pump-priming next year,” SCB said.

The UK-based bank said the Philippines’ budget deficit is likely to hit 4 percent of GDP, or higher than the government’s 3.2-percent ceiling due to its commitment of higher spending for infrastructure and social services.

“We view the pickup in growth as a positive for the peso, as it should stimulate capital inflows,” SCB said, adding that it upgraded the short-term foreign exchange rating for the peso to overweight from neutral, which reflects its expectation that the local currency will outperform key trading-partner currencies. The peso is expected to reach 47-to-the-dollar in the fourth quarter and 46 next year.

SCB said OFW remittances would increase by 6 percent this year from $16.4 billion last year. This growth will likely be driven by money sent home from Canada and Japan after both countries signed agreements with the Philippines to facilitate the deployment of Filipino workers.

“The improved growth outlook for 2010 is also underpinned by our expectation of a gradual recovery in the US economy, the largest source of inward remittances,” the bank said, adding that it expects inflation to reach 3 percent this year and 3.3 percent next year on firmer food prices.

Despite benign inflation, SCB projected the Bangko Sentral ng Pilipinas (BSP) to maintain low rates until next year to further stimulate growth and capital flows. The BSP has stopped cutting its key interest rates for two successive meetings of its policy-making Monetary Board, after the 200 basis points reduction since December last year. Its overnight borrowing and lending rates stand at record lows of four percent and six percent, respectively.

“We expect [BSP], which has a CPI [consumer price index] target of 3 percent [to] 5 percent for 2010, to remain in ‘wait and see’ mode for a prolonged period to ensure that the economy is firmly on the recovery path before it raises interest rates. As such, we expect BSP to keep the policy rate unchanged at 4 percent for the remainder of 2009 and 2010,” SCB said.

The British bank also said Philippine exports have a higher exposure—with 62 percent of the total in electronics—than other South East Asian countries such as Malaysia with 50 percent and Singapore at 40 percent.

As such, SCB expects Philippine exports to contract by 22 percent this year, which will likely lag the recoveries seen in Singapore and Korea, and expand by 10.4 percent by next year.

“While global electronics demand is recovering, it is expected to remain weak,” the bank said.

Moreover, lower oil prices and relatively weak domestic demand should lead to an improvement in the trade balance, SCB said, adding that the Philippines’ trade deficit would narrow to 3.7 percent of GDP this year and 3.6 percent next year from 4.7 percent last year. –Darwin G. Amojelar and Maricel E. Burgonio, Senior Reporters, Manila Times