Neda cuts growth target after subpar Q2 results

The Philippines’s lack-luster economic per-formance rooted on the government’s poor spending has made the country’s 2015 growth targets impossible to meet, according to the National Economic and Development Authority (Neda).

Neda Director General and Economic Planning Secretary Arsenio M. Balisacan told reporters on Thursday that the economy can only achieve a full-year growth of only 6 percent to 6.5 percent for 2015, after yet another disappointing results in the second quarter.

The Philippine Statistics Authority (PSA) reported that the pace of the country’s economic growth slowed to 5.6 percent in the April-to-June period, from 6.7 percent in the same quarter last year. With the growth of only 5 percent in the first quarter, the first-semester average was only 5.3 percent.

“Realistically, even the low-end [target] now is very much challenged. The DBCC [Development Budget Coordination Committee] technical working group is working on the numbers and we will meet soon to decide on the targets for the rest of the year. But it’s very likely that we will scale down the targets,” Balisacan said.

“We’re not projecting right now but what I’m trying to say is that the realistic scenario could be 6 percent to 6.5 (percent),” he added.

Balisacan said for the economy to grow 6 percent for the full year, the economy needs to register an average growth of 6.6 percent in the July-to-December period.

To reach 6.5 percent, the economy needs to post a growth of 7.7 percent in the second half of the year.

However, economists believe that hitting 6 percent this year may already be the highest growth that the country can register given its recent performance.

Former Philippine Economic Society President Alvin Ang said hitting a growth of 6 percent would still depend on how much election spending can affect overall consumption in the country.

Ang estimates that election spending increases overall consumption growth by 0.5 percentage point. This includes the impact on both household and government consumption.

Balisacan, on the other hand, estimates that election spending can increase gross domestic product (GDP) growth by 0.3 percentage point to 0.7 percentage point.

“[Full-year growth could be] toward the high side depending on election spending. [It] has a kind of multiplier effect on consumption growth,” Ang said.

Despite the slowdown in the country’s growth in the second quarter, Balisacan noted that government spending increased in the second quarter.

“The government stepped up spending and private consumption also remains fairly strong,” Gundy Cahyadi, Singapore-based economist at DBS Group Holdings Ltd., said before the report. “There’s going to be some negative growth impact from financial-market volatility, but fundamentals are way
more important at this point.”

The peso gained 0.1 percent to 46.665 against the US dollar at 10:50 a.m. local time. While the rout in emerging-market stocks and currencies has dragged the peso to a five-year low, it has still weakened less than other Southeast Asian currencies, losing about 4 percent this year.

Government spending climbed 3.9 percent in the second quarter from a year earlier, and consumer spending gained 6.2 percent. That helped counter weakening exports, which fell every month in the second quarter.

“The second-quarter GDP growth shows the expanse of the country’s resiliency from the prevailing weakness of the global economy,” Balisacan told a briefing. The significant improvement in government spending “gives us more confidence about the performance of the public sector in the coming quarters of the year.”

President Aquino, whose term ends in June 2016, had targeted growth of 7 percent to 8 percent this year and next. The Bangko Sentral ng Pilipinas (BSP) kept the benchmark rate unchanged this month, and Governor Amando M. Tetangco Jr. said this week that, while private consumption will continue to be well supported, it is necessary to find other drivers of growth.

Public construction also bounced back from a 24-percent contraction in the first quarter to a 20-percent growth. In the
second quarter last year, public construction only posted a growth of 5.7 percent.

“This is a result of government’s efforts to address issues on spending bottlenecks, especially for public infrastructure, which held back growth in the first quarter. This significant improvement gives us more confidence about the performance of the public sector in the coming quarters of the year,” Balisacan said.

Apart from better government spending in the coming months, Balisacan said the country may also benefit from the depreciation of the peso.

Balisacan explained that the depreciation of the peso will be beneficial to exporters since they will earn more for the products they sell abroad.

He said as long as the depreciation of the peso will not be sharp and will not be volatile, this will be beneficial to workers since it will protect them from losing their jobs in the manufacturing sector.

Balisacan also said that in terms of debt, the country’s borrowings are largely domestic, so the depreciation of the peso will not have a significant impact on the country’s payment of its debts.

“We acknowledge fears about the peso’s depreciation. However, as long as the depreciation is not sharp, the overall net effect of this development is still positive for the economy, especially for our workers,” Balisacan said.

“Overall, the growth in the second quarter shows that we are still on the right track in achieving our country’s development goals, especially within our objectives outlined in the Philippine Development Plan 2011-2016. But every achievement in the process of attaining a high and inclusive growth brings about new challenges,” he stressed.

Tetangco also admitted that the outturn for the entire 2015 growth will now be lower than the government’s full year target of the 7 percent to 8 percent.

“The higher second-quarter GDP number [relative to first quarter] was supported by solid domestic aggregate demand, particularly consumption and capital formation. Net exports detracted from growth. The Neda points to El Niño and external fragilities as potential risks to growth going forward,” Tetangco said. “With the second-quarter number and given the current operating environment, we can expect eco performance that is still strong, albeit more modest than the government’s full year target,” he added.

The central bank governor also reiterated that with this outturn, there “may be no need for any immediate recalibration of monetary-policy settings.”

He vowed, nevertheless, that the BSP will continue to coordinate with other government agencies on the assessment of trends in El Niño and their potential impact on output and the prices of vital goods and services.

“We will also remain watchful of global developments to see how these would affect domestic growth and inflation dynamics,” Tetangco said.

Finance Secretary Cesar V. Purisima, meanwhile, attributed much of the rebound to the improvement on the disbursements in the country.

“Following the President’s action on underspending, year-on-year growth in government expenditures for June breached 17 percent, pushing total expenditures above the trillion-peso mark by the first half of 2015,” Purisima said in a statement.

“We expect public spending to play a bigger role in second-semester performance as we have ample fiscal space in the P2.6-trillion 2015 budget to fund growth-inducing investments,” he added. –Cai Ordinario und Bianca CuaresmaBloomberg News with Bianca Cuaresma, Bloomberg News