Ayala-led BPI keeps cautious optimism
Despite the climbing inflation, and apparent uncertainties, the Bank of the Philippine Islands (BPI) remains cautiously optimistic about the country’s economic recovery.
According to BPI Global Markets economist Rafael Alfonso Q. Manalili, the bank anchored its confidence as it sees encouraging progress in consumer spending, remittances, and BPO (Business Process Outsourcing) revenues.
However, the Ayala-led bank said that policymakers must look at diversifying the economy’s growth drivers to provide a greater cushion for future shocks.
“The long-term prospects of the economy are good overall. We believe that the economy will continue to grow in the coming years at a healthy pace, not only this year, because of our growth drivers,” said Alfonso.
Alfonso noted that new growth drivers must come to the fore to ensure a more robust and faster economic recovery, citing the vulnerability of the current structure of the economy.
“The Philippine economy is a consumer-driven economy, and we have a strong consumer base. It’s an asset that has allowed us to grow by at least 6% in the past decade, but this makes us vulnerable in the context of a pandemic,” he said.
Household consumption and services were the ones most affected by the pandemic as people stayed at home for quarantine.
“The pandemic has taught us that we need to diversify our growth drivers. We need to go beyond household consumption and services so that we can have an additional cushion in case another shock happens. This will allow us to grow faster and will protect us from external shocks like the COVID-19 pandemic,” Manalili said, adding that the government should also fast-track infrastructure development to attract more investments.
The GDP (Gross Domestic Product) of the Philippines declined by almost 10% during the global health crisis, the biggest contraction in the ASEAN region, and has recovered more gradually compared to other ASEAN countries.
The country’s per capita GDP is still lower than the pre-pandemic level following the COVID shock. This would have been avoided if the growth drivers were more diversified.
Its ASEAN neighbors—like Thailand and Indonesia, which are less reliant on consumption and services and have a strong manufacturing base—have been able to ride on the global manufacturing boom during the pandemic, giving them a boost to gain momentum and recover faster.
For its part, the Philippine manufacturing sector has grown modestly by three percent vs. prepandemic level despite the support provided by global demand.
Diversification towards investment spending, manufacturing, and exports is crucial as shown by the country’s experience during the pandemic.
“We need to reduce the cost of producing goods, and to do that, we need to improve infrastructure. We have the highest electricity rates and transport costs in the region. It’s feasible for us to improve on that,” he said.
On the other hand, BPI expects the economy to grow by five percent to six percent in 2023 as local and global headwinds continue to weigh on growth.
One of the headwinds is high inflation which continues to beset consumer spending.
“Inflation has gone up significantly and it has a significant impact on the economy because we are a consumerdriven economy,” he said.
“We expect average inflation to settle within the 4.5 percent to 5.5 percent range this year. The decline in inflation will be gradual or slow because of persistent supply constraints especially in the agriculture sector,” he added.
Another headwind is the aggressive interest rate hikes by
central banks that are necessary to rein in the high inflation.
“It makes the cost of financing projects and investing in hard assets like equipment and factories more expensive. It might prevent the private sector from ramping up their capital expenditures,” he said.
BPI expects additional rate hikes throughout the first half of 2023 before a pause in the second half and possibly even a rate cut if the U.S. enters a recession, which could force the Federal Reserve to cut their rates.