HSBC sees signs of overheating

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Warns GDP growth may miss 2014 target

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Constrained by slow government spending, especially on expanding infrastructure to accommodate more investment, the consumer-driven Philippine economy may face growing risk of overheating, global bank HSBC said in a forecast for 2014.

HSBC sees lower exports and slow government spending persisting in the second half of the year, threatening to constrict growth in the economy during the period.

HSBC and another private bank warned that growth in gross domestic product (GDP) may miss the government’s target range of 6.5 percent to 7.5 percent for 2014.

HSBC sees only 5.9% growth
According to HSBC’s forecast, GDP growth may only reach 5.9 percent this year, slowing from 7.2 percent in 2013.

“In the latter half of the year, two events will occur, both leading to the fall of net exports: import growth will normalize once port congestion issues are resolved and exports will likely stall as the favorable base effects fade,” Trinh Nguyen, economist at the HSBC said in a report.

Nguyen explained that without a significant improvement in global demand and competitiveness, Philippine exports are not likely to repeat their strong performance in the second quarter of 2014.

Coupled with this, the contraction of imports in June, led by electronic products, suggests that exports are likely to be sluggish going into the third quarter because of a lack of inputs for electronics, a key export segment, Nguyen said.

“Thus far this year, private consumption, investment and government spending have been slowing,” she added.

The HSBC economist said although fiscal spending may pick up in the second half, its scope for growth will be limited because of the ongoing controversy over the Disbursement Acceleration Program (DAP), leading to more conservative spending patterns in the period, especially relative to previous years.

“Investment spending, too, is likely to slow. Import data shows that capital goods imports contracted sharply in June. Even if that normalizes in the second half of 2014, the expansion rate will be modest. Excitement is building over public-private partnership projects but we expect progress will be steady at best. Thus far, only seven projects have been awarded out of 49 in the pipeline,” she said.

In terms of manufacturing, Nguyen said the industry’s expansion may be limited by a sluggish pace of expansion in the electricity sector, which has fallen behind that of the general economy.

“We believe that without broad-based sectoral growth, especially in infrastructure investment, the economy will continue to show signs of overheating,” she concluded.

BPI predicts 6.2%
The Bank of the Philippine Islands (BPI) also believes the 2014 government’s growth target of a minimum 6.5 percent looks unattainable. BPI retained its full-year forecast of 6.2 percent, after seeing the second-growth GDP results of 6.4 percent.

In a commentary, BPI economists said the 6.4 percent GDP growth report for the second quarter gave the bank confidence to retain its full-year 2014 forecast of 6.2 percent, much faster than the pace expected for other emerging markets in Asia.

“The faster-than-expected print for the second quarter of 2014 helps reduce uncertainty about the sustainability of the Philippine economy’s surprisingly strong performance in the last few years. It was a relief to see that growth is finally being led by agriculture, manufacturing, as well as exports, while construction and retail trade take the backseat.

We will not be surprised if this will actually lead to an improvement in employment and poverty statistics this year versus 2013,” the commentary said.

The BPI economists expect a GDP rate of 6 percent or higher to be sustained in the second half as favorable domestic financial conditions continue to foster strong household consumption activity, which has provided a boost to the overall nominal output.

They also said that the still accommodative stance of the central bank is likely to continue to bolster investment activity, hopefully more into fixed capital and infrastructure and not road vehicles.

“We doubt, however, whether the government’s 6.5 percent to 7.5 percent growth can still be attained if national government spending in the second half of 2014 remains as unremarkable as it was in the first half,” the economists said.

Maybank more optimistic
Taking a more optimistic view, financial services group Maybank ATR Kim Eng said  the economy could grow within target this year at 6.8 percent.

Maybank said in its commentary domestic demand is likely to regain strength in the second half as the government addresses issues that distorted economic activity during the quarter.

“We think it will be most visible in government spending, that already surged 44 percent
year-on-year in June, and 50 percent of net of interest payments,” Luz Lorenzo, Maybank ATR Kim Eng economist said.

Besides a rebound in public spending, fixed investment may also pick up on the expected easing of the problem of congestion at the Manila ports, which has had an impact on production and consumer supply. The clearing of the ports has begun, and spending on durable equipment has also started to recover, the bank said.

“By the same token, total imports are likely to strengthen, resulting in weaker growth in net exports. Thus, we believe the composition of growth will revert to one led by domestic demand, supported by net primary income, mostly remittances from overseas Filipinos, that in the first half of 2014 grew 14 percent, better than 2.1 percent in the first half of 2013,” she said.

Lorenzo added that with the 6 percent GDP growth rate in the first half and prospects that logistical challenges and budget problems may be surmounted, the financial group maintains it 6.8 percent forecast for this year.

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