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Philippine economy not at risk from overheating — HSBC
MANILA, Philippines — British banking giant HSBC has played down fears the Philippines is the most at risk from overheating among countries in the Association of Southeast Asian Nations (ASEAN).
In its latest ASEAN Perspectives titled “Mind the output gap,” HSBC said the Philippine economic growth remains grounded on solid fundamentals.
Most market watchers fear the Philippines is most at risk from overheating due to robust growth in recent years, while inflation is now breaching the two to four percent target range set by the Bangko Sentral ng Pilipinas (BSP).
HSBC said the country’s economy has been running below potential since 2016 after growing above potential from 2012 to 2015.
It pointed out growth before 2010 was primarily driven by a combination of consumption and exports, “which led to actual growth oscillating above and below our estimate for potential growth but not necessarily raising potential output.
However, HSBC said this changed drastically since 2010 when fixed investment became a more significant contributor to gross domestic product (GDP) growth as a result of fiscal, economic, and social reforms.
“Higher investment helped increase industrial capacity, which also led to higher potential growth. In fact, potential growth has climbed steadily since 2010 to a point where it now exceeds actual growth, based on our estimates,” it said.
The bank added growth in the Philippines has been largely driven by greater capital mobilization, and the government’s commitment to invest further in both human capital and infrastructure should help sustain potential growth at above seven percent in the medium term,” HSBC said.
The Philippines has booked 76 quarters of uninterrupted gross domestic product (GDP) growth. The GDP expansion settled at 6.5 percent in the fourth quarter from the seven percent in the third bringing the full year 2017 growth at 6.7 pe rcent.
According to HSBC, this does not necessarily mean that growth will actually reach its potential every year, but this at least shows that the government’s seven to eight percent target is grounded on some theoretical basis.
On the other hand, inflation gradually moved down since 2010 after the BSP committed to a fixed inflation target over a two-year horizon.
Inflation kicked up to 4.3 percent in March from the revised 3.8 percent in February as a result of the transitory impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law.
“We believe higher inflation was originally triggered by the recent tax reform, but it is now becoming more broad-based. Recent readings show that even areas that are not directly affected by the tax reform have risen above their normal trends, while those that are directly affected are rising above our initial expectations,” HSBC said.
The broad-based inflation could be showing signs that there are indeed second-round impacts from the recent tax reform and could lead to even higher inflation expectations.
“These two are the very factors that the BSP has pointed to as reasons for possible rate hikes,” it said.
HSBC sees the BSP’s Monetary Board raising benchmark rates by 25 basis points to 3.25 percent in the second quarter to manage inflationary risks.
“But we don’t necessarily see an aggressive tightening path for the BSP given our view that the economy is not at risk of overheating,” HSBC said.
Source: https://www.philstar.com/business/2018/04/30/1810624/philippine-economy-not-risk-overheating-hsbc#XORH2BagZyIUAMCK.99