Growth momentum expected to continue

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THE PHILIPPINES was one of the fastest-growing economies in Asia in 2016, despite uncertainties brought about by leadership transition and developments in the external environment.

The government has vowed to sustain the solid growth in 2017 within the range of 6.5 percent to 7.5 percent by ramping up its spending for infrastructure and social services under the P3.35-trillion national budget.

Analysts, on the other hand, are forecasting a 5.6-percent to 6.9-percent GDP growth in 2017. (GDP, or gross domestic product, is the sum of goods and services produced in an economy in a given period.)

Developments
The economy posted a 7-percent GDP growth in the first three quarters—hitting the upper end of the government’s official target of 6 percent to 7 percent. It was faster than the respective growths of China, Vietnam, Indonesia, and Malaysia.


This growth was achieved amid political transition, following the change in presidency from Benigno Aquino 3rd to Rodrigo Duterte. It was also this year that various external developments took place, such as the US Federal Reserve interest-rate hike; the victory of Donald Trump as the new US President; the Brexit or the separation of the UK from the EU; and the ongoing rebalancing of the Chinese economy.

The government said that on the demand side, household consumption as well as investments in construction, public infrastructure, and durable equipment drove economic growth. This was supported by low inflation, low interest rates, better labor market conditions, and the steady growth in the remittances of OFWs or overseas Filipino workers. Government assistance, such as the Pantawid Pamilyang Pilipino Program, or 4Ps, also provided additional boost to consumer demand. From the supply side, the government said the agriculture sector started to recover, finally breaking five consecutive quarters of decline.

Growth in industry, particularly manufacturing, construction and utilities, accelerated. The services sector likewise improved overall, with stronger expansion in trade, finance, real estate, and public administration.

Monetary policy
In May, operational adjustments in line under the Interest Rate Corridor System pushed the central bank to adjust downward its key policy rates, cutting the overnight reverse repurchase to 3 percent from 4 percent, and the repurchase facility to 3.5 percent from 6 percent.

Solid economic growth, manageable inflation environment, and ample domestic liquidity environment allowed the Bangko Sentral ng Pilipinas (BSP) to keep its key policy rates unchanged for the rest of the year.

Inflation for the first 11 months averaged 1.7 percent, or below the central bank’s 2-percent to 4-percent full-year target.

Meanwhile, the country’s domestic liquidity, or M3 by central bank parlance, expanded by 12.7 percent year-on-year to P9.06 trillion as of November.

Investment, external position
Reflecting investors’ confidence in the Philippine economy, the BSP said foreign direct investment (FDI) inflows as of end-September already reached $5.87 billion, exceeding the total FDI inflows for calendar 2015 which stood at $5.7 billion.

Foreign portfolio investments amounted to $672.73 million in the first 11 months of 2016—a reversal from $473 million in net outflows in January to November a year earlier.

While the country’s investment climate continued to improve, one of the downsides is the worsening external position. Wide trade gap resulted in a balance of payments deficit of $206 million at end-November, a reversal of $2.136 billion surplus the previous year. Latest Philippine Statistics Authority (PSA) data showed the country’s trade gap in the first 10 months of 2016 reaching 106 percent to $19.97 billion from $9.67 billion a year earlier.

Meanwhile, the country’s gross international reserves (GIR), which act as the country’s buffer against external shocks, slipped to their lowest level in nine months at $82.73 billion in November. However, it was enough to cover 9.6 months’ worth of imports.

In terms of exchange rate, the BSP said the peso depreciated by more than 5 percent in 2016. At the last trading day of the year, the peso remained at its eight-year low, closing $49.72 against the dollar.

Fiscal performance
The government’s budget shortfall expanded fivefold in the first 11 months of the year. In January to November, the deficit expanded to P235.2 billion from P46.5 billion a year earlier. Cumulative revenue rose 4 percent year-on-year to P2.03 trillion, while spending expanded 14 percent to P2.265 trillion.

Net of interest payments, however, the budget yielded a P50.2-billion primary surplus at the close of the 11-month period, or 79 percent narrower than a surplus of P241.3 billion posted a year earlier. Weak local currency, however, boosted outstanding debt of the national government to P6.1 trillion as of end-November from P5.95 trillion a year earlier, reflecting an increase of 2.6 percent or P152 billion.

Sustaining growth
The National Economic and Development Authority (NEDA) said that together with a low inflation environment, sustained strong growth would pave the way for a continuous and faster poverty reduction. “We see this momentum continuing next year and hopefully in the years to come,” Socioeconomic Planning Secretary Ernesto Pernia said.

He added, however, that this will have to be supported by sustained and deepened reforms such as the comprehensive tax reform program sustained investments in infrastructure, easing of restrictions on foreign investments, reduction of cost of doing business, and strengthening agro-industrial linkages, and, of course, the full implementation of Responsible Parenthood and Reproductive Health Law. The government said it would continue to prioritize agricultural development within the broader framework of rural and regional development.

NEDA is currently drafting the Philippine Development Plan 2017 – 2022, which is slated for release by early February.

This is the first medium-term development plan to be anchored on AmBisyon Natin 2040, which envisions the Philippines as “a prosperous, predominantly middle-class society where no one is poor; where our people will live long and healthy lives, be smart and innovative, and will live in a high-trust society.”

The Department of Budget and Management (DBM) said the 2017 budget—so far the biggest annual budget assembled—empowers government agencies by funding expanded and improved social services that will lift Filipinos out of poverty.

Outlook
Going forward, forecasts by private and multilateral institutions showed economic growth in 2017 may accelerate to as high as 6.9 percent or moderate to 5.6 percent. The government is expecting GDP to grow 6.5 percent to 7.5 percent in 2017.

The Washington-based lender World Bank has the most optimistic growth target at 6.9 percent, saying the increase in capital investment will remain to be the Philippine economy’s primary growth engine.

Barclays, a UK-based investment bank, meanwhile, expects full-year 2017 growth to come in at 6.8 percent, noting that an accommodative monetary stance and an expansionary fiscal stance should continue to support growth.

Debt watcher Fitch Ratings is forecasting Philippine GDP expansion of 6.6 percent for 2017, among the highest in Asia as it expects domestic demand to remain strong, fuelled by sustained remittance inflows and business process outsourcing revenues; favorable demographics; and continuous capital investment needs, despite a tepid global economy. “Plans by the new administration (elected in May) to accelerate infrastructure spending should also boost growth,” it said.

The London-based research consultancy firm Capital Economics expects GDP to continue growing at a decent pace of 6.5 percent, but noted its outlook has become much less certain following the election of Donald Trump to the US presidency.

“While it remains to be seen if Trump will follow through on some of his more protectionist policies, if he did, the repercussions for the Philippines would be significant,” it said. “The Philippines’ booming business outsourcing sector, which has benefited hugely from US investment, would also be hit hard by any attempt to bring back jobs to the US.”

It also stressed that the Philippine President himself continues to unnerve investors with a series of controversial comments and erratic foreign policy changes. “With Duterte in charge, it is hard to rule out a sudden shift in economic policy or a disruption of the political stability that has characterized the last six years. Either it would cause sentiment to sour and growth prospects to weaken,” it said.

Asian Development Bank (ADB), the Manila-based lender, and Credit Suisse both see the 2017 GDP at 6.4 percent. ADB said brisk growth in 2016 is expected to ease next year as the impact of spending for the May elections fades, and in light of global economic uncertainties.

Credit Suisse said the country’s pivot to China is a net positive for 2017 GDP and balance of payments as it will help bring in more FDI and tourism from China in 2017, with political drags removed.

Meanwhile, BMI Research and Nomura agreed the Philippine economy would continue to outperform on the back of an ongoing investment boom in the country at 6.3 percent. “Although there are lingering uncertainties regarding Duterte’s foreign policy direction, we believe that Manila’s friendly overtures toward Beijing and Tokyo should be positive for growth as it is likely to facilitate investment and trade flows with two of the largest economies in the region,” BMI said.

Despite the noise from Duterte’s controversial rhetoric, Nomura expects the government to make more progress on infrastructure spending than its predecessor and boost reforms, particularly by cutting red tape and implementing comprehensive fiscal changes.

For its part, the UN Economic and Social Commission for Asia and the Pacific (Unescap) said growth could slow to 6.2 percent, but did not explain its forecast. ANZ Research, on the other hand, said sustained strong fiscal spending would continue to be supportive to bring economy to grow by 6 percent.

The least optimistic is Swiss global financial services firm UBS, which warned that Philippine economic growth is set to dip next year to 5.6 percent on expected lower government spending and tighter global monetary conditions.

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