S&P downscales RP growth projection in 2009 to only 2.2%

Standard & Poors (S&P) has downscaled its growth projection for the Philippines in 2009 from the original forecast of 3.3 percent to only 2.2 percent.

The Bangko Sentral ng Pilipinas (BSP) is expected to continue easing its policy settings to prop up the economy but S&P said growth-supportive monetary policy would still fail to fully offset the impact of slowing external demand and declining remittances.

Remittances are widely expected to drop sharply this year, with the central bank projecting a single-digit growth for the first time since the government started tracking these inflows.

Foreign banks expect declines of as much as 20 percent.

S&P chief economist for Asia Pacific Subir V. Gokarn said growth for this year would slowdown as conditions worsen.

By 2010, however, Gokarn said the economy should recover somewhat and the growth in gross domestic product (GDP) could bounce back to 3.7 percent to 4.2 percent.

S&P said its baseline forecasts for 2009 and 2010 were based on its baseline US scenarios of a two-percent decline during 2009 and positive growth of two percent in 2010.

“We have also forecast a worst-case scenario for the region, based on a worst-case scenario for the US of a 3.8-percent decline in GDP during 2009,”Gokarn said.

Under the worst case scenario, Gokarn said the country’s growth would drop to zero and 0.5-percent range.

This year, S&P expects the national average inflation rate to range between 3.7 to 4.2 percent, due in part to base effects. By 2010, the agency said inflation rate would stabilize at 4.2 percent to 4.7 percent.

S&P’s inflation forecast upgraded its earlier projection that the rate would range between five and 5.5 percent this year.

The agency’s projections were also not far from the projections made by the Bangko Sentral ng Pilipinas (BSP) which said inflation rate would drop to as low as 3.9 percent this year and rise slightly to 4.7 percent in 2010.

Gokarn said the Philippine economy already saw some softening in the fourth quarter of 2008 due to lower domestic consumption and exports. He said a fall in investment was key to this growth decline.

This year, Gokarn said exports of both electronic and commodity goods would bear the brunt of the weak global environment. Boosts from remittances and

investment flows would also lessen.

Gokarn said these factors would lead to a weaker 2009 before what he said would be a “considerable revival” in 2010.

“The positive factor in this low-growth scenario is lower inflation,” Gokarn said. “This has allowed monetary policy to shift in favor of growth.”

Gokarn said, however, that although further cuts are expected, the central bank is likely to proceed with caution because inflation is still high despite being on a downward trajectory.

Gokarn said lower imports this year would also help counter lower exports and transfer payments, but would result in a lower current account surplus in 2009.

“An exports revival, with a pick-up of growth in the global electronic-product cycle, would boost growth momentum in 2010,” he said.

S&P said the outlooks for the other indicators took into account both supply and demand factors, including domestic monetary and fiscal stances and the softening of commodity prices.

S&P said these assumptions feed directly into lower inflation and interest rate outlooks as well as a generally stable current account outlook, even though the surpluses of many Asian countries would shrink and some would move towards balance.–Des Ferriols, Philippine Star