Swiss global financial services firm UBS warned that Philippine economic growth is set to dip next year on expected lower government spending and tighter global monetary conditions.
In a report released on Tuesday, UBS estimates growth in Philippine gross domestic product (GDP) this year at 6.6 percent, which could dip to 5.6 percent in 2017 and later regain some pace to 6 percent in 2018.
Its estimate for 2016 is well within the 6 percent to 7 percent official target of the government for this year.
However, UBS’s 2017 forecast is lower than the government target range of 6.5 percent to 7.5 percent for next year.
“Growth in the Philippines is set to slow, having accelerated sharply in 2016. So far, 2016 has seen extremely strong domestic demand and, in particular, booming investment growth delivered better-than-expected real GDP growth,” it said in the report.
For the first nine months of 2016, the economy grew by 7 percent, gaining traction from 5.7 percent a year earlier.
Election-spending impact wanes
UBS pointed out that the growth drivers of this boom, such as election-related spending—including a large fiscal impulse (or stimulus) and loose monetary conditions that fueled credit growth—may no longer exist next year.
“We expect both of these to reverse in 2017 as deficit projections show a smaller fiscal impulse, and global monetary conditions tighten,” it said.
After raising its key policy rates earlier this month, the US Federal Reserve gave strong indications it may raise its key rates three more times next year, which had sent jitters throughout the global markets, including the Philippines and its local business community.
UBS noted that while the Philippine government forecasts fiscal deficits of 3 percent of GDP in both 2017 and 2018, there is little fiscal impulse coming through in 2017 and none in 2018.
Although the new administration’s focus on big infrastructure projects could allow fiscal policy to be more supportive of growth than the deficit implies, UBS doubts that this could bring about the desired boost as early as 2017.
“[I]nfrastructure projects tend to be plagued by delays, but better traction on public projects could lift growth in 2018. There remains a risk that spending will front-run revenue raising—resulting in a higher deficit (and fiscal impulse) than forecast over the next two years,” it said.
No longer benign in 2017
UBS also said that benign inflation in the Philippines this year is likely to change in 2017 as oil prices are expected to rebound to an average of $60 a barrel next year and $70 in 2018.
“This should push up headline inflation in the Philippines, to above 3 percent in 2018. While this is within the BSP’s target band of 3 percent ± 1 percent, in the context of rising global rates (and a worse external balance) this should encourage rate hikes from [the]BSP,” it said.
Given this, UBS expects the central bank to raise its key rates by 50 basis points in 2017 and 50 basis points in 2018, in line with the US Fed move.