RP economy seen to grow 4.3% in 2010

MANILA, Philippines – Investment bank Barclays Capital sees the Philippine economy expanding at a faster pace of 4.3 percent and inflation kicking up to six percent this year on the back of election-related spending, robust private consumption, and higher investments.

Prakriti Sofat, regional economist of Barclays Capital, said in a market commentary that the investment bank’s gross domestic product (GDP) growth outlook was more optimistic than the growth target of 2.6 percent to 3.6 percent set by economic managers through the Cabinet-level Development Budget Coordination Committee (DBCC).

Sofat said consumer prices would accelerate to six percent exceeding the target set by the Bangko Sentral ng Pilipinas (BSP) of between 3.5 percent and 5.5 percent this year due to higher commodity and oil prices.

“We continue to expect inflation to average six percent in 2010 given higher food- and fuel-related costs, with our growth projections of 4.3 percent also being more upbeat than the official forecast of 2.6 percent to 3.6 percent,” she stressed.

Sofat said the country’s GDP would have to expand by 0.5 percent quarter on quarter through 2010 to achieve the lower end of the range and by 0.8 percent quarter on quarter to achieve the top end of the target.

The economist pointed out that the country’s GDP growth this year would be fuelled by election-related spending and strong private consumption supported by overseas Filipino workers’ (OFW) remittances as deployment remained healthy through 2009.

She also cited a turnaround in investment inflows in line with improving business confidence.

The country’s GDP growth slackened to 0.9 percent last year from 3.8 percent in 2008 due to the full impact of the global economic meltdown brought about by the financial crisis that started in the US late of 2008. The growth was slightly above the low end of the range of 0.8 percent to 1.8 percent.

According to her, the outlook for both manufacturing and services remains favourable in line with improving external trade and domestic demand but that of the agricultural sector that accounts for 17 percent of GDP would be bleak on the back of decline in rice production that was hit by typhoons Ondoy and Pepeng and the impending impact of El Nino.

“Agriculture will be a bit of wild card given unfavourable weather conditions and damage to irrigation systems. However, we believe that things should start looking up in the second half of the year, if not earlier,” she said.

On the other hand, Barclays Capital sees inflation kicking up to six percent this year from 3.2 percent last year. This would exceed the BSP’s inflation target of 3.5 percent to 5.5 percent for 2010.

Despite the increase, the investment bank said the BSP’s Monetary Board would likely start tweaking its key policy rates starting the third quarter of the year. Monetary authorities slashed the rates by 200 basis points between December 2008 and July 2009 that brought the overnight borrowing rate to a record low of 4.0 percent and the overnight lending rate to 6.0 percent.

Sofat pointed out that Barclays Capital expects the BSP to jack up its policy rates by as much as 50 basis points this year.

“On policy rates, despite the hike in the rediscount rate, we continue to expect the central bank to keep the reverse repurchase rate anchored at 4 percent in the coming months, with the first hike materialising in Q3 10. We expect policy rates to end the year at 4.5 percent,” she said.

She added that monetary authorities would start withdrawing some of the liquidity-enhancing measures that were introduced in the height of the global credit crisis.

Last January 28, the BSP started withdrawing liquidity-enhancing measures by raising the re-discount rate by 50 basis points to four percent from 3.5 percent making it equal to the reverse repurchase rate.

“The hike in the re-discount rate was consistent with the rhetoric from the central bank that it will start exiting some of the liquidity enhancing measures that were introduced during the crisis,” she said. –Lawrence Agcaoili (The Philippine Star)