Nomura cuts 2022 Philippines forecast

JAPAN’S Nomura Holdings Inc. has trimmed its Philippine growth forecast for this year to 6.3 percent from 6.8 percent, pointing to fallout from Russia’s ongoing invasion of Ukraine.

“We cut our GDP (gross domestic product) growth forecast… further below the government’s range of 7 [to] 9 percent,” Nomura economists Euben Paracuelles and Rangga Cipta said in a report released over the weekend.

This reflects “the impact of the conflict in Ukraine, which has led to a sharp rise in energy prices and may also cause slower external demand, particularly from weaker growth in the euro area,” they added.

The price of Brent crude has hit $113 per barrel and that of Dubai crude is not far behind at $110. Locally, pump prices have risen weekly for three months straight, spiking last week by nearly P6 per liter for diesel with a more than double P13 per liter expected this week.

Paracuelles and Cipta noted that the surge in oil prices would push inflation to 4.6 percent this year, up from the 2.9 percent previously estimated for 2022 and higher than the government’s 2.0 to 4.0 percent target.

“Surging inflation is also likely to dampen consumer spending when the unemployment rate is still high at 6.6 percent,” they said.

Still relatively low vaccination rates and the risk of a fresh Covid-19 surge due to campaigning for the May elections could also impede an ongoing economic reopening, the Nomura economists added.

A deterioration of the war in Ukraine, vaccination delays and political instability were tagged as downside risks for Philippine economic growth, while an accelerated reopening and a sharp drop in oil prices were seen as the main upside risks.

Given the inflation outlook, the Bangkok Sentral ng Pilipinas (BSP) is not expected to cut the reserve requirement ratio by 300 basis points this year. Policy rates, however, will likely be raised by 25 basis points in the fourth quarter and by 125 basis points in 2023.

“Similar to last year, we think BSP will likely look through supply side inflation pressures that may keep headline inflation above target and only pledge to stay vigilant against second round effects,” the economists said.

“[The] BSP, in our view, believes economic output will return to its pre-Covid level later this year, setting the stage for the start of its hiking cycle in Q4 (fourth quarter),” they added.

The fiscal deficit, meanwhile, was forecast to hit 6.9 percent of GDP this year, below the government’s 7.5 percent projection. “The 2022 budget affirmed the implementation of the Supreme Court ruling that increases fiscal revenue transfers to local governments by a massive 38 percent,” Paracuelles and Cipta noted.

“This not only runs the risk of underspending, as local governments have weak absorptive capacity, but also leaves less resources for the central government to address Covid, in line with our view of some fiscal paralysis this year,” they added.