METROBANK unit First Metro Investment Corp. (FMIC) has taken an optimistic view of the Philippine economy’s prospects despite a waning in first-quarter growth, forecasting an expansion of between 6.6 and 7.5 percent for the full year.
The forecast, however, did not address any possible impact on government spending and consumer and investor confidence that could come from Tuesday’s issuance of the unanimous Supreme Court ruling that the controversial Disbursement Acceleration Program (DAP) under the Office of the President of the Philippines was unconstitutional.
FMIC cited robust domestic demand and the resurgence of manufacturing this year as key drivers of the Philippine economy, which the government has forecast to grow in a target range of 6.5 to 7.5 percent for 2014.
“The economic outlook for the Philippine economy remains favorable despite a slower-than-expected gross domestic product growth [GDP] in the first quarter,” FMIC President Roberto Juanchito Dispo said during the FMIC Economic Briefing held in Makati City on Thursday.
Strong domestic demand, remittances
Dispo said that increased government spending, strong consumer demand and remittances from overseas Filipino workers (OFWs) will continue to drive growth.
“Confidence in the real economy remains high given the country’s strong external liquidity and investment position, and effective monetary policy,” he added.
In a presentation at the FMIC briefing, University of Asia and the Pacific (UA&P) economist Dr. Victor Abola said that government spending will support growth as it boosts reconstruction efforts in typhoon-hit areas in the second semester of the year.
Abola also noted that the government’s improved fiscal space, which recorded a budget surplus of P11.8 billion in May, will also be supportive of spending.
He said debt ratio, which had fallen to 49.2 percent in 2013, is expected to decline further to 47.5 percent and 44 percent in 2014 and 2015, respectively, which means that the money that would have gone to interest payments could be channeled instead to infrastructure spending, which is projected by Abola to reach $18 billion in 2016.
The economist added that the resurgence in manufacturing will also contribute to the growth, particularly in employment generation. He cited as an example the 1.65 million new jobs created as of end-April 2014, an improvement from the less than 1 million new jobs recorded in the previous eight quarters. According the Philippine Statistics Authority (PSA) data, unemployment declined to 7.0 percent in April, lower by half a percent than the previous labor force survey in January and the year-earlier unemployment rate.
Abola also said that external factors should be supportive of the Philippine economy, given improvements in the economies of the United States and the Eurozone, as well as continued economic growth across developing Asia.
The UA&P economist did note that there are some risks to the overall positive outlook, such as the truck ban in Manila, which Abola said has resulted in higher freight costs that are reflected in food prices and have hurt exporters.
Abola also said that power shortages in the country and the resulting high cost of electricity have had a negative impact. To address this, the government and the private sector need to create more investments for the power industry, he said.
Inflation to accelerate further
Meanwhile, FMIC said that inflation is expected to further accelerate and that an earlier projection of 4 percent should be adjusted upward to 4.3 percent.
Increasing food and other consumer commodity prices as well as increased oil prices brought about by escalating tension in Iraq and Ukraine were cited as the main drivers of inflation.
FMIC’s inflation forecast is lower than the 4.4 percent target set by the government, which was adjusted upward after the somewhat higher than expected 4.5 percent inflation print in May. FMIC explained, however, that inflation should be offset by the weakening of the peso, expected to average P44 to P46 to the dollar for the rest of the year, thanks to a stronger US dollar brought up by a decline in the Euro. The European Central Bank last month implemented a number of anti-deflationary measures designed to increase the money supply and kick-start credit and spending in the Eurozone.
FMIC also said continuing strong global demand for skilled Filipino workers will ensure the resiliency of OFW remittances, which the financial firm expects to expand within a range of 5.5 to 6.5 percent, higher than the first quarter figure of 5.2 percent but slower than the full-year growth in 2013 of 7.4 percent.
Also, FMIC also sees growth in exports and imports, with exports growing at 6 to 10 percent on the back of expansion in manufacturing, particularly in the electronics sector, and in mining. Imports on the other hand are expected to expand by 8 to 12 percent, driven by continuing robust consumer spending and business expansion.