Inflation, lack of action main risks to PH growth

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Higher consumer prices, other domestic factors and trade protectionism will be the main risks to robust Philippine economic growth this year, HSBC said.

In a report, the banking giant said it expected headline gross domestic product (GDP) growth to stay strong at 6.7 percent this year, fueled by higher consumption and government expenditure that would support investment.

Full-year growth came in at 6.7 percent in 2017, slower than the 6.9 percent recorded in 2016. The government has a 7 percent to 8 percent target this year.

“The Philippines continues to enjoy a robust domestic growth story, but the thorn in its side is inflation,” HSBC said.

The bank said its forecasts showed headline inflation peaking at well above 4 percent in the middle of the year, which poses a risk of inflation expectations de-anchoring from the Bangko Sentral ng Pilipinas’ (BSP) 2.0-4.0 percent target range.


Using 2012 as base year, the bank revised its headline forecasts to 4 percent for 2018 and 3.3 percent for 2019.

“We believe one rate hike is enough for the BSP based on our view that its current reaction function relies on inflation and inflation expectations and not on an overheating economy,” it added.

That said, the bank said the BSP’s dovish tone after February’s 3.9 percent inflation result also showed its strong preference for keeping policy rates on hold for as long as feasible.

“This poses a risk that the BSP passes off this year’s high inflation as merely an effect of the recent tax reform, and so keeps policy rates unchanged,” it pointed out.

Inflation aside, HSBC said the primary risks to the growth outlook remained local.

It warned that a failure by the government to break ground on key infrastructure projects this year and/or the government reverting to its historical pattern of underspending could reduce investor and business confidence.

Meanwhile, a continued deterioration of private construction also poses a risk that a labor shift from agriculture to construction would not be absorbed by the market.

“This would weigh not just on fixed investments but also on consumption — the two primary drivers of the Philippine economy,” it said.

HSBC highlighted that growth in public construction had seemingly come at the expense of private construction, which declined by 2.5 percent in the fourth quarter of 2017 after two straight quarters of decelerating growth, and capital upgrading in other industries such as agriculture and textiles.

Meanwhile, a rise in trade protectionism — particularly for semiconductors — would also pose a risk to the Philippine economy given that half of its exports are related to electronics.

“But risks due to looming policy tightening in the US (United States) and EU (European Union) remain relatively benign, due to relatively low foreign participation in its equity and debt markets, its low total and short-term external debt-to-GDP ratios (24 percent and 22 percent, respectively), and its sizeable foreign exchange reserves (8.2 months import cover),” HSBC said.

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