S&P expects inflation rise to be temporary; no overheating seen

S&P Global Ratings said that it expects the uptick in Philippine inflation to be temporary, and reiterated its view that overheating is unlikely because the country’s growth is based on solid investment and consumer spending.

S&P downplayed fears of the economy running too hot following a 6.8% rise in gross domestic product ( GDP) in the three months to March, up from 6.5% during the fourth quarter of 2017 and 6.4% a year earlier.

“The sustained high pace of growth plus a recent increase in inflation has led some analysts to wonder about the possibility of overheating,” S& P said in its monthly report on Asia- Pacific economies.

“However, in our view, the high growth is the result of continued demographic dividends as well as higher investment rates in the past half-decade, while higher inflation is a temporary effect of the implementation of the first tax reform package earlier this year.”

Overheating risk has been highlighted amid a continued increase in bank lending. While credit growth eased to 18.3% at the end of March — the slowest rise in over a year, according to the Bangko Sentral ng Pilipinas (BSP) — growth remains in double digits.

The government has set a target of 7-8% GDP growth this year, picking up from 2017’s 6.7%, after expanding infrastructure spending.

The government hopes to spend P1.068 trillion on infrastructure, equivalent to 5.4% of GDP. This forms part of P8-9 trillion worth of total infrastructure investments from 2016-2022.

Inflation surged to a five-year peak of 4.5% in April using 2012 as a base.

The BSP estimates that inflation will breach its 2-4% target band for 2018, with the 2018 forecast now at 4.6% due to the impact of the tax reform law as well as surging world crude prices.

S&P said overheating concerns are overblown as current price spikes are transitory.

“[ T] he recent rate hike by Bangko Sentral will help to ease potentially higher inflation expectations,” the credit rater said.

S&P expects Philippine GDP growth of 6.7% this year, with the expansion sustained by a young labor force with greater purchasing power due to the increase in take- home pay from income tax cuts. The expected surge in consumer spending is expected to offset “some moderation” in merchandise exports.

“Inflation will likely remain high for a few more months before the tax reform-induced oneoff spike dissipates in the second half of the year,” it added.

Trade tensions between the United States and China remain the biggest risk for the Philippines so far, with S&P pointing out that such a shock could mean bigger capital outflows and trade losses for the Philippine economy.

S& P bumped up its credit outlook for the Philippines to “BBB positive” last month, which points to a possible rating upgrade over the short term amid an improved fiscal environment following the implementation of the Tax Reform for Acceleration and Inclusion law in January.