Philippines: BPI sees below 6% GDP growth next year

MANILA, Philippines — Ayala-led Bank of the Philippine Islands (BPI) sees the country’s economic growth slowing to below six percent but is expected to avoid recession next year amid external headwinds.

In a virtual press conference, Jun Neri, lead economist at BPI, said the gross domestic product (GDP) growth of the Philippines may ease to 5.6 percent in 2023 from the projected seven percent expansion this year.

“Full year real GDP growth is expected to be between five and six percent versus the government’s expectation of six to seven percent GDP growth as inflation finally erodes overall demand and the lagged effects of rapid policy tightening finally gain traction,” Neri said.

BPI’s growth forecast is below the revised six to seven percent target by economic managers.

Earlier, the Cabinet-level Development Budget Coordination Committee (DBCC) maintained its GDP growth target from 6.5 to 7.5 percent for this year but lowered next year’s target from 6.5 to eight percent.

After exiting recession with a GDP growth of 5.7 percent in 2021 from a 9.6 percent contraction in 2020, the country sustained the momentum with a 7.7 percent expansion from January to September amid the lifting of strict COVID-19 quarantine and lockdown protocols.

The Philippine economy grew by a stronger-than-expected 7.6 percent in the third quarter from 7.5 percent in the second quarter despite the elevated inflation that led to a tightening cycle by the Bangko Sentral ng Pilipinas (BSP).

The BSP is widely expected to deliver another 50-basis-point hike today after raising key policy rates by 300 basis points to tame inflation and stabilize the peso.

“The Philippine economy has a big chance of avoiding a recession in 2023,” Neri said.

According to Neri, the lagging sectors of the economy will continue to benefit from the resumption of activities banned during the height of COVID-19 lockdowns.

Combined with the said recovery, Neri said favorable demographics would mean household consumption would grow by at least five percent next year.

The economist of the Ayala-led bank said the ongoing tightening cycle of the Monetary Board would serve as a drag to economic growth this year until next year.

“We could have grown eight or even maybe nine percent on yearly basis if the tightening didn’t have to be so cramped or be so sudden and done abruptly. This will surely have some drag on performance not just this year but next year,” Neri said.

He said inflation is likely to remain above four percent in 2023, exceeding the BSP’s two to four percent target range, and would continue to hurt the economy during the early part of next year.

“Inflation is expected to stay close, if not only slightly lower than five percent after reaching nearly six percent this year,” he said.

He said the BSP would probably not cut rates as quickly as the US Fed and would probably keep a comfortable reverse repurchase rate interest premium over Fed rates in order rebuild the country’s economy’s external buffers.

He added that the tensions in Eastern Europe may ease in 2023 as the hard winter from December to February would likely bring both parties to the negotiation table.

On the other hand, US inflation is not expected to fall below four percent immediately and would mean the US Fed is expected to continue hiking through the middle of next year, before they pause in response to a confirmed recession.