Economic recovery unlikely in 2019 — think tanks

by Mary Grace Padin, Czeriza Valencia (The Philippine Star) – Jan 26, 2019

MANILA, Philippines — The Philippine economy is unlikely to recover this year due to tighter monetary conditions, global trade tensions, and a “deteriorating” business environment, two global think tanks said in separate reports.

In a report responding to gross domestic product (GDP) figures for 2018, London-based Capital Economics said factors such as high interest rates, delayed passage of the 2019 national budget, and slowing export growth would drag on growth this year.

“The prospects of a sustained rebound in growth in 2019 are slim,” said economist Alex Holmes. “Growth is likely to stay stuck at six percent.”

Meanwhile, Fitch Solutions Macro Research, a unit of New York-based Fitch Ratings, said it is maintaining its GDP growth forecast for the Philippines at 6.1 percent in 2019, slower than the 6.2 percent expansion recorded in 2018.

“We at Fitch Solutions reiterate our view that the Philippine economy will struggle to reverse its weakening growth momentum over the coming quarters owing to tighter monetary conditions, the potential for a re-escalation of global trade tensions, as well as a deteriorating business environment,” it said.

“We are, therefore, maintaining our forecast for real GDP growth in the Philippines to slow to 6.1 percent in 2019,” Fitch Solutions added.

The Philippine economy grew at a slower pace of 6.2 percent in 2018 from 6.7 percent in 2017, failing to hit the revised government target, but remained among the fastest growing economies in Asia.

Capital Economics said government spending, which was a key driver of growth last year, is set to increase at a lower pace due to the delayed passage of the national budget for 2019.

The budget, which has yet to be passed by Congress, provides for an increase in infrastructure spending to five percent of GDP, from 4.9 percent in 2018.

As monetary policy operates with a lag, the effects of higher interest rates are also expected to dampen growth this year as it will weigh on investment.

The Bangko Sentral ng Pilipinas (BSP) raised policy rates by a total of 175 basis points last year to rein in inflation.

Slowing global demand is also expected to continue to be a drag on export growth this year. As such, import growth is likely to continue outpacing export growth.

On the upside, falling inflation may blunt the effects of the factors as consumption will be reinvigorated.

Headline inflation has already fallen from a peak of 6.7 percent in September to October to 5.1 percent in December and is expected to continue falling sharply over the coming months on falling oil prices.

“If inflation drops back as expected, the BSP is likely to start loosening monetary policy gradually sometime around the middle of the year. However given the usual lags, any boost to growth is likely next year rather than this year,” said Holmes.

Capital Economics thus kept its earlier growth forecast of six percent for the Philippines this year, still among the fastest growth in Emerging Asia but well-below the government’s optimistic target of seven to eight percent.

According to Fitch Solutions, the main driver for the deceleration of economic growth in 2018 was a slowdown in private consumption and exports. The global research firm said it expects these components to remain weak in 2019.

“We expect overall growth to continue to be negatively impacted by headwinds to private consumption as domestic monetary conditions tighten further over the coming quarters, alongside global rising interest rates,” Fitch Solutions said.

It also remains pessimistic over the situation between the US and China, saying there would not be likely any lasting solutions to the issue after the countries’ 90-day truce.

“A re-escalation of trade tensions will not only disrupt global supply chains and investor confidence, but also weigh directly on China’s economic growth and hence export demand from the Philippines,” the research firm said.

Fitch Solutions also said the growth in government consumption and capital formation would likely be insufficient to offset the impact of external headwinds and weak private investment.

“We highlight that the government is constrained by its limited ability to raise revenues and we believe that the heavy government spending will be unsustainable and insufficient to support economic growth sustainably amid rising headwinds,” it said.

While it noted the importance of infrastructure investment in the country for long-term growth and competitiveness, Fitch Solutions said large-scale public-led infrastructure projects in the Philippines “are typically not maximized, due to hasty appraisal and a sub-optimal public procurement system.”

“This could end up increasing the country’s debt burden without a commensurate increase in productivity, instead weighing on future growth potential,” Fitch Solutions said.

The research firm, citing the Philippines’ ease of doing business ranking and corruption perception index ranking, also said the country’s deteriorating business environment would likely weigh on private investment over the coming quarters.

However, Fitch Solutions said the Philippine government could still ramp up government spending further and breach the non-statutory budget deficit limit of three percent of GDP to achieve its economic objectives.

“The relatively large foreign reserves (more than eight months of import cover) and low public debt load (42.1 percent of GDP) suggest that there is room for the government to borrow and spend aggressively, which would provide a short-term boost to growth,” Fitch Solution said.