Growth promise intact despite ‘noise’
ECONOMIC growth will likely be uninterrupted by political “noise” generated by President Rodrigo R. Duterte’s outbursts, since this has so far left reforms unscathed, Nomura Global Research said in an Oct. 20 report.
An above-6% expansion is expected to continue until 2018, Nomura economists said, with Mr. Duterte’s reform agenda — led by an infrastructure push, fiscal restructuring, as well as cutting red tape and corruption — expected to sustain the country’s robust growth despite hiccups from his controversial tirades, to the point of even surpassing the past administration’s successes.
Gross domestic product (GDP) growth is expected to clock 6.7% this year, close to the higher end of the government’s 6-7% goal and higher than forecasts given by multilateral lenders. The projected pace eases to a 6.3% expansion in 2017 and then picks up to 6.5% in 2018.
FOUNDATIONS FOR ECONOMIC RESILIENCE ESTABLISHED
“We reiterate our out-of-consensus 2016 and 2017 GDP growth forecasts of 6.7% and 6.3%, respectively, but raise our 2018 forecast to 6.5% to reflect our view that the foundations for economic resilience have been established and that, despite the recent political noise from President Duterte’s rhetoric, reform progress will likely continue, which bodes well for the longer-term growth outlook,” read Nomura’s Asia Special Report, titled: “Philippines: Beyond Words.”
“As this economic strength was developed over time through fundamental improvements and rising investment, it will likely prove resilient. If anything, we view the Philippine economy as having undergone a structural shift, as we have seen a sizeable increase in potential growth.”
More growth is expected following a 7% upswing in the second quarter, Nomura added, noting a surge in investments that points to domestic-driven expansion in the face of pale global prospects and makes the country an outlier in Asia in terms of economic performance.
A young workforce also makes conditions ripe for faster growth, coupled with subdued inflation and a falling debt stock.
Citing gains made under former president Benigno S. C. Aquino III, Nomura analysts Euben Paracuelles and Levanya Venkateswaran said greater progress is likely to be clinched under Mr. Duterte’s term, which ends on June 30, 2020, as reforms installed by the past government enabled current economic managers to hit the ground running. “Combining a strong focus, a strong mandate, macroeconomic stability and strong political will, we believe President Duterte’s government will likely make more significant progress in implementing public infrastructure projects than its predecessor.”
“[ W]e believe reforms are very unlikely to be unwound under the new government. These gains have been institutionalized and we think there are clear signs that the prospects for more economic reforms remain positive.”
In particular, Mr. Duterte’s 10-point socioeconomic agenda would invite more foreign direct investments, coupled with the government’s commitment to plug the gnawing infrastructure gap.
“Early progress” is expected in terms of trimming red tape, corruption, and installing lower income tax rates.
Economic growth may even touch 7.5% should the Duterte government realize plans to raise the share of public infrastructure spending in GDP to 7% from the 5% programmed this year. There remains ample fiscal space to raise spending, Nomura noted.
‘PAST THE INITIAL SHOCK’
Nomura also expects local financial markets to strengthen.
“We upgrade the Philippines to overweight as markets move past the initial shock of Duterte, while favorable growth dynamics and reform prospects are strengthening,” the report read.
At the same time, local political developments pose the biggest threat to the country’s outlook, although analysts reminded that investors should not be unduly worried by the President’s tough talk on foreign relations.
“The main risk to our view stems from domestic politics, specifically an escalation of the campaign against drugs, which could continue to weigh on investor sentiment,” Nomura said, referring to a body count that has zoomed past 3,000 since the antinarcotics war began in July.
“We are less concerned with the potential for adverse changes to foreign policy,” said the analysts, who cautioned “against jumping to any conclusion that the new government’s foreign policy will become isolationist.”
“That said, if reforms continue, as we expect, their positive implications for growth are unlikely to be overshadowed by a pickup in political risk premia.”