Standard Chartered ups RP growth forecast to 5.9%

MANILA, Philippines - Standard Chartered Bank revised upwards its economic growth forecasts for the Philippines this year and next year after the country’s gross domestic product (GDP) zoomed to its fastest pace in almost three years in the first quarter of the year amid the recovering global economy.

In a paper, Standard Chartered economists Vincent Tsui and Simon Wong said the bank has raised its GDP growth forecast this year to 5.9 percent instead of 3.3 percent for this year and to five percent instead of 4.1 percent for next year.

“Taking all factors into account, we are revising up our 2010 GDP forecast to 5.9 percent from 3.3 percent and our 2011 forecast to five percent from 4.1 percent,” Tsui and Wong stated in the report dated May 27.

The National Statistical Coordination Board (NSCB) earlier reported that the country’s GDP surged by 7.3 percent in the first quarter of the year from 0.5 percent in the same period last year. The National Economic and Development Authority (NEDA) was expecting a growth of between 2.9 percent and 3.9 percent for the first quarter while private economists penned an expansion of between four percent and five percent.

Standard Chartered said the first quarter GDP growth got an “extra kick from fiscal spending” as government spending jumped by 18.5 percent with the front-loading of infrastructure projects ahead of the May 10 presidential, national and local elections

The economists pointed out that household consumption expanded by 5.9 percent as the amount of money sent home by overseas Filipino workers (OFWs) went up by seven percent in the first quarter of the year.

Likewise, they added, that capital formation surged by 24.3 percent while industrial output expanded by 15.7 percent followed by the services output that grew by 6.1 percent compensating for the 2.5 percent decline in agricultural output due to the El Niño weather conditions.

“The GDP report shows that the Philippine economy is on a firmer footing that many, including ourselves, had expected. Going forward, the successful conclusion of the election has removed a key political uncertainty, and the recovery will remain supported by rising business investment and domestic consumption,” the report added.

Standard Chartered said the stronger-than-expected GDP growth in the first quarter would not be sustained in the coming quarters since the lingering turmoil in Europe would have a direct impact on the country’s exports.

Data showed that Europe is the country’s largest trading partner accounting for about 20 percent of its exports and 13 percent of its OFW remittance income.

“Nonetheless, we expect the strong Q1 growth momentum to moderate in the coming quarters. In addition to a higher base of comparison, fiscal spending is set to slow as the new government focuses on capping the deficit in an effort to dissociate the Philippines from the European sovereign debt crisis,” Standard Chartered added.

The bank explained that majority of the country’s exports go to stronger states such as Germany and France putting Philippine exporters and beneficiaries of OFW remittances at a disadvantage.

“We expect these developments to slow the pace of growth around mid-year, without derailing the recovery,” Standard Chartered said.

Economic managers through the Cabinet-level Development Budget Coordination Committee (DBCC) see the country’s GDP expanding between 2.6 percent and 3.6 percent this year after slackening to 0.9 percent last year from 3.8 percent in 2008 due to the full impact of the global economic meltdown.

Standard Chartered also expects the Bangko Sentral ng Pilipinas (BSP) keeping its key policy rates unchanged at record lows but would continue to unwind liquidity-enhancing measures during the policy-setting meeting of the Monetary Board on Thursday due to Europe’s debt crisis.

“Despite today’s strong GDP report, we expect current financial-market volatility emanating from the European crisis to prevent BSP from hiking rates at its June 3 meeting. Even so, we expect BSP to continue to unwind extraordinary liquidity measures and to mop up excess liquidity in the market by restoring the bank reserve requirement to the pre-crisis level of 21 percent from 19 percent currently,” the bank added.

The economists pointed out that monetary authorities would start raising its key policy rates by a total of 75 basis points starting the third quarter of the year until the fourth quarter of the year.

“We now expect BSP to kick-start its tightening cycle in the third quarter with two 25 basis point hikes, followed by another 25 basis point hike in the fourth quarter to manage inflation expectations,” Tsui and Wong added.