PIDS, Citi forecast slowdown

CONSENSUS is building up both in government and in the private sector that this year’s economic growth target would not be met.

Josef Yap, president of state-run Philippine Institute for Development Studies (PIDS), told reporters on Thursday that the country’s gross domestic product (GDP) would grow 5.9 percent this year or lower than the official target of between 7 percent and 8 percent.

Yap blamed the slowdown on higher food and fuel prices, volatile capital flows and the absence of election-related spending.

He projected inflation to climb to 4 percent this year, higher than the average of 3.8 percent in 2010.

He warned of a marked slowdown in the services sector, mainly because of the “election effect,” adding that growth would settle at 5.7 percent this year from 7.1 percent last year.

The economist said the agriculture sector would recover, while manufacturing will remain robust due to external demand.

“Food manufacturing should experience higher growth in 2011 due to higher performance of agriculture,” he said.

In addition, remittances will continue to provide a steady source of income, which will contribute to slightly higher growth in consumption, he said.

Last year, the economy grew by 7.3 percent, the highest in 34-years from 0.9 percent in 2009.

In a report, Citigroup said Philippine GDP growth would slow to 5.5 percent amid rising inflation and delays in the public-private partnership (PPP) projects. The bank’s latest forecast is higher than its earlier estimate of 5.2 percent.

Jun Trinidad, Citi economist, said downside risks reduce the potential for a repeat of the 7.3-percent growth in 2010, including the delay in the Aquino administration’s PPP infrastructure agenda, which was pushed back later this year.

“Our 2011 forecasts preclude the PPP’s upside but this delay in bidding dampens any expectations of an upgrade. Construction and its job generation effect would have been the key beneficiary of PPP implementation,” Trinidad said.

Another downside agent to growth is rising inflation and its negative income effects.

Citi said inflation may have likely hit 4 percent in February.

“Over the past couple of months leading to January when [Consumer Price Index] surprised on the upside with inflation of 3.5 percent year-on-year, these commodities were showing sharp increases of 2 percentage points or more despite the high base effect for some [e.g. fuel for cooking like liquefied petroleum product],” Trinidad said.

He said 9.2 percent of the headline CPI basket—fuel prices of LPG, gas, kerosene, electricity, cooking oil, sugar and sugar products, etc.—should continue to provoke higher inflation pressures in the first quarter this year.

While most of the foregoing elements constitute mostly energy-based items, the miscellaneous foods with reference to cooking oil and sugar will probably lead the rest of the food components in reporting faster rate increases, Trinidad said.

“We think second round price effects are bound to show up in the other components of core inflation sooner rather than later that can elevate inflation in February and for it to probe 4 percent year-on-year,” the economist said.

Trinidad said that upcoming subsidy reforms would allow prices of regulated public services to be adjusted, triggering more inflation.

Wage demands would be agitated as well, while a mixture of higher inflation and potential weak dollar return could further trim the real peso value of the remittances.

The economist said inflation and the Middle East-North Africa conflict would heighten risk on remittances. But overseas demand for sea-based workers, business process outsourcing (BPO) activities and 2010 investment project approvals translating into investments could help ease the downside.

“Facing rising downside risks to growth, [Bangko Sentral ng Pilipinas] would resist strong peso appreciation so as not to handicap exports, BPO and remittances. Rate tightening coupled with liquidity draining mechanisms led by special deposit account ballooning to P1.35 trillion, would likely lead the fight against inflation,” Trinidad said. –Darwin G. Amojelar, Senior Reporter and Lailany P. Gomez, Reporter, Manila Times