BETTER-THAN-EXPECTED third quarter results have led to revisions to full-year Philippine growth forecasts.
Fitch unit BMI Country Risk & Industry Research now expects 2023 gross domestic product (GDP) growth to hit 5.7 percent instead of 5.3 percent, while the Maybank Investment Banking Group raised its forecast to 5.9 percent from 5.2 percent.
Both projections remain below the government’s 6.0- to 7.0-percent target for the year.
GDP growth accelerated to 5.9 percent in the third quarter, rebounding from the lower-than-expected slowdown of 4.3 percent three months earlier.
All economic sectors posted expansions but recovery was said to have been primarily due to government spending having grown by 6.7 percent following a 7.1-percent contraction in the second quarter.
“In light of the latest figures, we have revised our 2023 growth forecast upwards from 5.3 percent to 5.7 percent,” BMI said in a November 10 commentary.
“This keeps the Philippines on track to be the fastest-growing Southeast Asia economy,” it added.
The Fitch Group unit also expects higher growth of 6.2 percent next year but said the government’s medium-term target of 6.5 to 8.0 percent would be hard to achieve due to headwinds.
Maybank, meanwhile, said: “We expect government expenditure to support domestic demand growth in the fourth quarter of 2023 with the push to expedite government programs and projects.”
It added that the economy would still face headwinds from elevated inflation and interest rates as well as sluggish external demand, maintaining its 2024 growth forecast at 6.5 percent.
BMI said “the external sector stands out as the biggest area of weakness and will remain so over the coming quarters,” adding that “against the backdrop of weak global growth, demand for Philippine goods and services looks set to remain lackluster.”
Risks to the forecast hinge largely on the outlook for the global economy, the Fitch unit said.
“If the US were to successfully avoid a recession in 2024, this would help bolster Philippine export performance. In the same vein, a better-than-expected economic performance by the Chinese economy will also have a similar impact on the Philippine external sector.”
BMI expects inflation to average 4.7 percent this year before returning to the Bangko Sentral Ng Pilipinas’ (BSP) target range of 2.0-4.0 percent next year.
“This means that consumer prices will fall back to trend in 2024, offering some much-needed respite for real household incomes,” it said.
High interest rates, meanwhile, will keep a cap on investment activity but some relief will come in the second half of 2024.
The BSP implemented an off-cycle rate hike last month, bringing the policy rate to 6.50 percent, the highest since 2007. Key rates have now been a total of 450 bps since May last year in a bid to temper inflation, with pauses ordered during the last four regular policy meetings.
BMI said the policy rate will likely be raised by another 25 basis points this Thursday due to price stability concerns as well as robust GDP growth.
“We think that the BSP will only cut rates in H224 (second half of 2024), in line with our expectations for the US Federal Reserve (Fed),” it added.
“A quick return to loosening before the Fed could not only de-anchor inflation expectations but exacerbate weakness in the peso,” BMI continued.
“This means that restrictive financial conditions will continue to weigh on domestic activity for at least the first half of the year.”
Maybank, on the other hand, expects interest rates to stay unchanged for the rest of the year and that these will stay high longer than previously expected.
Private consumption growth consequently is expected to slow to 5.5 percent from 7.0 percent.
With inflation having markedly slowed to 4.9 percent in October, the bank subsequently trimmed its 2023 forecast to 6.0 percent from 6.3 percent. It warned, however, that there was still a risk of “sticky and elevated” price growth.
The impact of the El Niño weather pattern and rice export bans by producers could disrupt output on supply and lead to higher food prices, Maybank said.
“Secondly, the potential for nationwide daily minimum wage hike could put further upside risk to the inflation outlook,” it added.
A third factor would be further hikes in transport costs should oil prices rise due to political tensions in the Middle East.
Still, the bank said that headline inflation would likely continue trending downward due to rice harvests and steady supplies of vegetables and other basic commodities.
“At the same time, the government is expected to continue with non-monetary measures to ensure an adequate supply of food, amid factors like El Niño, which is expected to remain until mid-2024,” it added.