StanChart hikes Philippines growth forecast

MANILA, Philippines - British banking giant Standard Chartered Bank has upgraded its economic growth forecast for the Philippines this year as the country’s domestic engine continues to fire on all cylinders.

Chidu Narayanan, economist for Asia at Standard Chartered Bank, said in a research note titled “Philippines: Still Shining,” the country’s gross domestic product (GDP) would expand 6.8 percent this year, making it the fastest growing economy in the Association of Southeast Asian Nation (ASEAN).

The revised projection is moderately higher than the 6.7 percent forecast released last January. The government has penned a GDP expansion of between 6.5 and 7.5 percent this year.

“We expect another strong year for the Philippines in 2017 – we forecast GDP growth of 6.8 percent. This would make the Philippines the fastest-growing ASEAN-6 economy for the second consecutive year,” he said.

The country’s GDP growth accelerated to 6.9 percent last year from 5.9 percent in 2015 due to one-off boost from election-related spending, the higher end of the six to seven percent target set by economic managers of the Duterte administration.

Narayanan said GDP would expand by seven percent in the first half of the year before easing to 6.5 percent in the second half as the high base effect from last year kicks in.

“Strong domestic demand, increasing infrastructure investment and steady services sector growth will remain the primary growth drivers, in our view,” he said.

According to Narayanan, headwinds to growth would continue to come from the external sector.

“Growth in imports, particularly of capital goods, is likely to remain strong amid robust infrastructure investment, keeping the trade balance in deficit. Still strong services exports should help to offset the slower rise in good exports,” he added.

Amid the robust domestic demand, the investment bank sees inflation rising faster to 3.5 percent this year before easing to 3.1 percent next year from 1.8 percent last year.

“We expect headline inflation to continue to tick up until the third quarter on low base, high commodity prices, and weak currency. We expect that inflation will peak in October,” he added.

Narayanan said a weaker-than-expected peso coud push inflation higher but would still fall within the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP).

The benign inflation would give the BSP’s Monetary Board enough leeway to keep interest rates unchanged this year. Likewise, the central bank would likely keep the reserve requirement ratio for banks currently pegged at 20 percent, unless liquidity tightens.

“We expect BSP to maintain a neutral monetary policy stance, keeping both the overnight borrowing rate and the standing overnight deposit rate on hold throughout 2017,” the economist said.

Narayanan said the next central bank chief who would replace BSP Governor Amando Tetangco Jr. whose six-year term is set to expire on July 2 could be a hawkish surprise.

Frontrunners are BSP deputy governors Nestor Espenilla Jr. and Diwa Guinigundo, former trade secretary and Monetary Board member Peter Favila as well as East West Banking Corp. vice chairman and CEO Antonio Moncupa Jr.

“If a non-central banker is appointed, we see a higher risk that the central bank will take a more hawkish stance than Tetangco. This could bring forward the timing of BSP interest rate hikes,” Narayanan said.