ING chief economist and strategist Joey Cuyegkeng is optimistic on the Philippines’ economic growth, but he cautioned against expectations for increased financial costs because of higher yields and a weak peso that may buffet the financial markets.
He said sustained consumption growth, accelerated government spending, and strong investments will drive the economy to grow 6.5 percent in the next six years. But he added that investments would contribute 30 percent only of GDP by 2020, from 26.9 percent in 2016.
Citing President Rodrigo Duterte’s infrastructure program, which aims to increase spending above 5 percent of GDP over the next six years, Cuyegkeng said he expects private spending to follow suit.
He said the construction sector would register a 15.9-percent annual growth, higher than the 8.6-percent annual growth during the presidency of Benigno Aquino 3rd.
But while these tailwinds are expected to propel growth, Cuyegking said, the economy will be confronted with headwinds.
In the medium term, combined structural inflows from remittances by the overseas Filipino workers (OFWs) and revenues from the BPO, or business-process outsourcing, sector, are expected to normalize to a single-digit growth between 2017 and 2022, coming from a double-digit growth from 2011 to 2014.
This is a downside risk to consumer spending that accounts for 70 percent of the economy. Nevertheless, the government’s effort to seek financing from Japan and China may provide some support to the government’s infrastructure program.
Cuyegkeng said he expects “yields to rise,” believing that the monetary policy setting will change “from neutral to hawkish” this year.
This is driven by inflation rate moving near the upper limit of 2 – 4 percent, a target by the Bangko Sentral ng Pilipinas (BSP), and rising interest rates in the United States.
As money supply starts to stabilize this year, inflation pressure will result in higher yields as market players try to maintain positive real interest rates.
In the medium term, the government needs to manage its fiscal position more efficiently. Fiscal slippage may lead to higher inflation, need for larger government financing and less favorable credit rating.
Cuyegkeng also said he expects the peso to depreciate further because of factors both here and abroad.
Yields in the US, for instance, will continuously increase with the market pricing in two Federal Reserve rate hikes—a total of +50 basis points (bps)—and the Fed looking at three rate hikes (a total of +75 bps).
Uncertainties surrounding the political landscape in Europe may result in investors buying safer haven assets—a US dollar positive.
In the local front, recent developments in the government resulted in souring sentiment and market commanding higher-risk premium.
This, together with narrowing current account balance, adds depreciation pressure to the local currency.