UBS keeps Philippine forecasts

PHILIPPINE economic growth is expected to remain robust this year, Swiss financial services firm UBS AG yesterday said, but this could slow next year as financial conditions tighten.

Edward Teather, senior economist for ASEAN at UBS, said in a teleconference that the firm was forecasting Philippine gross domestic product (GDP) growth of 6.5% this year and 5.8% in 2015.

The figures are unchanged from April, or before the announcement of the first quarter’s weaker-than-expected 5.7%. Last December, UBS projected growth to reach just 6% this year and 5.3% next year.

“The Philippine economy has shrugged off natural disasters and difficult global economic conditions, and we continue to expect growth in the country to be strong,” Mr. Teather said.

“First quarter expansion was a bit disappointing, but we do not see growth slowing sharply from here.”

The government is targeting GDP growth of 6.5-7.5% this year and 7-8% in 2015.

“[W]e see manufacturing activity bouncing back in the second quarter,” Mr. Teather said.

“Reconstruction efforts for last year’s calamities will also help growth, as well as an expected pickup in exports due to the ongoing global economic recovery,” he added.

This world recovery, which could spur the normalization of easy monetary policies in advanced economies, could lead to tighter domestic financial conditions that will dampen growth.

“Recovery in the US is a double-edged sword. It means less easy policy on the horizon. Our view is that the Federal Reserve will finish tapering its stimulus by the fourth quarter and start raising rates by the second quarter of 2015,” Mr. Teather noted.

“While countries in Asia like the Philippines will benefit from the recovery, especially in terms of trade, the positive credit cycle brought about by easy policy in the US is likely to turn and have negative side effects.”

The Philippines, he said, is among the countries that have reaped the benefits of loose monetary policy.

“Overly easy monetary policy conditions -- both domestic and external -- have supported the Philippines’ growth. There are some concerns of a maturing credit cycle, and our outlook of higher inflation supports this,” Mr. Teather said.

UBS sees domestic inflation this year averaging at 4.2% and, in 2015, at 4.5%.

The Bangko Sentral ng Pilipinas (BSP) aims to keep inflation within 3-5% this year and 2-4% next year.

“We think these inflationary pressures will compel the BSP to increase policy rates, taking the overnight borrowing rate to 4% by end-2014 and then to 5% at the end of next year,” Mr. Teather said.

“During its last meeting, the BSP raised SDA (special deposit account) rates and not the overnight rate. But we think for the next meeting, it will be inclined to raise both SDA and overnight rates...,” he added.

Last June 19, the policy-setting Monetary Board raised SDA rates across all tenors to 2.25% from 2%. Overnight borrowing and lending rates were kept at 3.5% and 5.5%, respectively.

An oil price shock arising from the conflict in Iraq could also prompt a rate hike. The upcoming 2016 elections, meanwhile, would spur government spending next year, which could help offset the rate hike’s impact on growth.

source:  Businessworld