Fitch unit hikes 2018 Philippines growth forecast to 6.5%

MANILA, Philippines — BMI Research has upgraded the country’s economic growth forecast, but sees expansion slowing down after a strong performance in the first quarter.

The research arm of the Fitch Group raised its domestic product (GDP) growth forecast for the Philippines to 6.5 from the original target of 6.3 percent.

“On the back of a stronger-than-expected real GDP growth performance in the first quarter of 2018, we have raised our real GDP growth forecast for 2018 to 6.5 percent, from 6.3 percent previously,” BMI said.

It said the growth acceleration from the revised 6.5 percent in the fourth quarter was mainly driven by strong fixed capital formation, particularly in the construction sector that was supported by the government’s massive infrastructure program.

“This was slightly different from 2017 when growth was largely driven by the ongoing global economic recovery, which raised the demand for Philippine exports,” it said.

However, BMI said it is sticking to its view that economic growth would moderate over the coming quarters.

“We maintain our view that growth is likely to remain on a slowing path over the coming quarters given that monetary conditions are expected to tighten further, and the deterioration in the business environment will likely continue to weigh on private investment and confidence,” BMI said.

Even as the Philippines continues to enjoy positive demographics, the Fitch unit said the economy is showing signs of overheating and the deterioration in the business environment would weigh on private investment.

Amid the expected slowdown, BMI said President Duterte’s expansionary fiscal policy would continue to provide support to an above six percent headline GDP growth in the coming quarters.

BMI said another major economic growth theme in the Philippines is the positive demographics that would continue to support the development of the labor-intensive business process outsourcing (BPO) and manufacturing industries, as well as the retail and consumer goods sectors.

It added the peso has been one of the worst performing currencies in the region year-to-date, and likewise for the benchmark Philippine Stock Exchange index.

BMI said inflation would remain an issue over the coming months even if the Bangko Sentral ng Pilipinas (BSP) raised benchmark rates by 25 basis points last May 10 as inflation rose to a fresh five year high of 4.5 percent in April from 4.3 percent in March.

BMI sees the Monetary Board further raising interest rates by another 25 basis points toward the end of the year to curb rising inflation from higher global oil prices and the impact of the new tax reform law.

“Such a move may slow domestic demand and will likely act as a dampener to growth. In addition, we expect the deteriorating business environment to continue to weigh on private investment over the coming quarters,” it said.