MUFG says Philippine growth upside has moved beyond base effects

THE Philippine economy has moved beyond the stage where any growth upside is due to base effects, Japan’s MUFG Bank said on Wednesday, as it upgraded its 2022 forecast for gross domestic product (GDP) to between 7.5% and 8%, following a stronger-than-expected performance in the first nine months.

MUFG Senior Currency Analyst Jeff Ng said the Philippines may also exceed the bank’s 6% forecast for 2023, citing “strong momentum” from 2022.

In August, MUFG released GDP forecasts for the Philippines of 6.7% this year and 6% in 2023.

“Given the strong numbers that we’ve seen in the (past) quarter… growth could really wedge between 7.5-8% for the rest of the year, assuming no significant material downside risk (emerges),” Mr. Ng said.

“There’s also some upside risk to growth next year as well owing to the strong momentum that we have seen in the economic growth over the past few quarters, especially the positive Q3 number,” he added.

GDP growth in the third quarter rose accelerated to 7.6% from 7% a year earlier and 7.5% in the second quarter, according to preliminary data from the Philippine Statistics Authority.

For the nine-month period, GDP growth averaged 7.7%, exceeding the government’s 6.57.5% target.

According to Mr. Ng, Philippine growth has been driven by the economy’s normalization since the coronavirus disease 2019 (COVID -19) pandemic.

“Private consumption and investment have been very strong since the COVID 19 pandemic. And it is not a matter of base effects anymore. Since the base effects have worn off, the numbers look fairly positive for the year ahead,” he said.

Household consumption rose 8% year on year, easing from the 8.6% in the second quarter but still higher than the year-earlier 7.1%. Quarter on quarter, household final consumption grew by 5.7%.

Gross capital formation, the investment component of the economy, grew 21.7% in the third quarter, against 20.8% a year earlier and 21.1% in the second quarter.

Mr. Ng said the bank expects private consumption and investment growth to remain strong moving forward, mainly driven by remittances and infrastructure spending.

The Bangko Sentral ng Pilipinas (BSP) said on Tuesday that cash remittances coursed through banks rose 3.8% year on year to $2.84 billion in September, the highest cash total since July.

The strong dollar is thought to have encouraged OFWs to send more money home, where their families are dealing with rising prices of food, utilities and transport.

“We are likely to see lower inflation of 3.9% next year, compared to 5.5% this year,” Mr. Ng said, adding that the bank expects the BSP to continue with its policy tightening in order to address inflation.

“We are expecting that the BSP (to) hike by at least another 75 basis points (bps) for the upcoming meeting (today). Perhaps there could be another 50-bp of rate hikes for December, but we have to firm up our view based on the latest developments in inflation,” he said.

The Monetary Board is expected to raise key interest rates by 75 bps today to match the Federal Reserve’s latest tightening move. The board has so far raised rates by 225 bps since May.

Inflation remained elevated as the fourth quarter started, surging to 7.7% in October. October also marked the seventh straight month that inflation breached the BSP’s 2-4% target.

“Inflation should start to come off as some of the international food prices start to retreat and imported inflation will be less of an issue by next year compared to that of this year,” he added.

Still, Mr. Ng warned that food inflation may hit 6% this year and 7.9% next year due to increases in meat, fish, and vegetable prices.

The peso may finally continue to rebound going forward as traders price in a slower pace of tightening by the Fed as inflation eases, Mr. Ng said.

US inflation slowed to 7.7% in October from 8.2% in September. Month on month, the consumer price index rose 0.4% after rising by the same margin in September.

The Fed has raised borrowing costs by 375 bps since March, including its fourth 75-bp rate hike recently.

“In light of these developments as well, there could be some potential strength and rebound in some of the currencies that have underperformed this year, including the peso,” Mr. Ng said.

“The peso could be one of the currencies that may do better than some of (its) peers next year, assuming some of the risk factors do not materialize,” he said.

The peso closed at P57.35 against the dollar on Wednesday, weakening from its P57.21 finish Tuesday. In the year to date, the peso has weakened by 11.1% from its Dec. 31 close of P51.

Mr. Ng also added that growth in business process outsourcing revenue and remittances may continue to support the peso this year. —