Slower growth expected

THE PHILIPPINE economy is expected to grow at a slower pace this year — but still within the government’s target — given risks from a weak global environment and “bureaucratic bottlenecks,” a New York-based consultancy yesterday said.

“From a high of 6.6% in 2012, we expect the pace of growth to slow a bit to 6.1% in 2013 as weak external growth and a strong local currency weigh down exports,” GlobalSource Partners said in a quarterly economic report.

The government is targeting 6-7% growth this year.

Economists Romeo L. Bernardo and Marie-Christine Tang, GlobalSource’s local partners, said advanced markets, primarily the US and Europe, would likely post slower growth or stay in recession.

“The worst case would involve a sharper fiscal contraction in the US and deeper recession in Europe with China unable to pick up the slack due to internal excesses built up over the years. Tensions in the Middle East may again flare up reversing the forecast downtrend in oil prices,” they said.

“Internally, remaining bureaucratic bottlenecks may again stall government spending, keeping a lid on investment ratios and souring investor moods,” the economists added.

The report noted that the country’s macroeconomic fundamentals remained robust, which have attracted a surge in capital flows that are expected to weigh on the Bangko Sentral ng Pilipinas’ (BSP) policy moves this year.

“The problem of capital flows is expected to be compounded by ‘risk on’ conditions in global financial markets and, following S&P’s (Standard & Poor’s) positive outlook last December, expectations of the Philippine credit crossing over to investment grade that will allow funds restricted to highly-rated securities to come in,” it adds.

This would also affect the peso-dollar exchange rate, which could reach P40.50 this year and P40 in 2014 after averaging P42.2 last year.

Inflation, meanwhile, is seen rising to 3.6% this year and 4% in 2014 — within the central bank’s 3-4% target — from last year’s five-year low of 3.2%. The BSP’s 2013 forecast is 3.1%.

“A benign inflation outlook for 2013/14 gives the BSP some room to maneuver … While there are a number of upside risks to inflation, these are balanced on the downside by weak global growth prospects that will keep a lid on commodity price increases, including of food and oil,” the report read.

Despite these factors, however, the central bank is expected to hold policy rates at record lows of 3.5% and 5.5% for overnight borrowing and lending, respectively.

It may instead “continue to nudge down interest rate differentials to curb speculative flows using other instruments at its disposal,” given a move to slash rates on its special deposit accounts to a uniform 3% for the seven-day, 14-day and one-month tenors.

“Alternatively, based on its pronouncements, it can also work on influencing the volume of flows by easing foreign exchange rules to encourage more outflows or for more calibrated interventions to lessen systemic risks, continue to tighten macroprudential rules,” the economists noted.

On the fiscal side, meanwhile, they expect the deficit to have settled at 2.2% of gross domestic product or P279.1 billion last year, below the 2.6% cap set by the government, on the back of improved revenue collections and better government spending.

The shortfall stood at P127.3 billion as of November based on latest available data.

“Overall, we expect the budget deficit to slightly breach government’s 2% target in the next two years but with government’s declining interest cost, the debt dynamics will result in further reductions in the debt ratio,” the economists added.

“We expect government expenditures to continue improving based on ongoing reforms to speed up budget implementation, including in procurement as well as a new rule shortening the validity of appropriations to one year.”

The challenge this year is to ensure that last year’s high growth is sustained, with the economists saying “the Philippines will again need to rely more on domestic sources of growth in the near term.”

“In our central scenario, we hinge our higher-than-consensus growth [forecast] on the domestic macro policy environment continuing to be supportive particularly in terms of higher government spending, further expansions in private investments, and election spending aiding consumption growth.” –Bettina Faye V. Roc, Reporter, Businessworld

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