Philippines: Growth likely to hit target, fueled by higher consumer spending

MANILA, Philippines — The Philippine economy is expected to grow by 6.5 percent this year with domestic demand seen to remain strong despite high inflation, according to First Metro Investment Corp. (FMIC) and University of Asia and the Pacific (UA&P) Capital Markets Research.

In the Market Call report for September released over the weekend, FMIC and UA&P said they expect full year gross domestic product (GDP) growth to be at 6.5 percent, the lower end of the government’s target of 6.5 to 7.5 percent for the year.

Earlier, FMIC and UA&P said the 7.4 percent GDP growth in the second quarter should help the country reach a six to seven percent full year growth this year.

“Domestic demand, driven by robust employment gains at the start of the  third quarter, despite the onset of the rainy or typhoon season, supportive manufacturing sector with August PMI (Purchasing Managers’ Index) higher than July showing 12 consecutive months of expansion, and sturdy tax collections, should continue driving the economy,” the report said.

In the first half, the economy grew by 7.8 percent.

While high inflation may slow consumer spending, FMIC and UA&P believe the peso’s depreciation, which would allow overseas Filipino workers’ (OFW) families, business process outsourcing workers, exporters and their suppliers to have more money, could offset the negative impact.

“We don’t think inflation has peaked since we still need to account for the second round effects of the crude oil price surge in H1 (first half) play out in other commodities. However, the peak should not depart much from the current pace,” FMIC and UA&P said.

FMIC and UA&P expect inflation to peak at 6.7 percent by this month or October this year.

Headline inflation eased to 6.3 percent in August from 6.4 percent in July due to slower upticks in transport and food prices.

This brought average inflation in the January to August period to 4.9 percent, higher than the two to four percent target band of the Bangko Sentral ng Pilipinas (BSP).

FMIC and UA&P said the exchange rate is expected to remain volatile with the movement to depend on US inflation and the US Federal Reserve’s action.

The peso fell to a new record low of 58.50 to $1 last Friday from Thursday’s 58.49.

“Although there is no need for BSP to match the Fed hikes one-for-one due to the much higher inflation in the US, the peso-dollar rate will take a further hit should BSP lag too much behind the Fed’s moves,” FMIC and UA&P said.

Last Sept.22, the BSP raised policy rates by 50 basis points, bringing the benchmark rate to 4.25 percent, and the rates for the overnight deposit and lending facilities to 3.75 percent and 4.75 percent, respectively.

The BSP’s move follows the US Federal Reserve’s 75-basis-point rate hike to rein in inflation.

FMIC and UA&P said the local currency may rebound by November as remittances come in.

National Economic and Development Authority Undersecretary Rosemarie Edillon said earlier the agency is hopeful the peso would stabilize toward November and December as remittances sent for Christmas help prop up the local currency.

FMIC and UA&P also said the country’s full year trade deficit is seen to reach the $55 billion to $60 billion range.

According to the Philippine Statistics Authority, the country’s trade deficit widened to $5.93 billion in July, a new record high, as imports grew and exports contracted.

From January to July of this year, the country’s trade deficit reached $35.75 billion, higher than the $21.46 billion in the same period last year.