Economics | Philippines Yuichi Izumi
Philippines
Yuichi Izumi Exhibit 146. Philippines: summary of Nomura forecasts
2004 2005 2006 2007 2008F 2009F National account (% y-y, on a real basis)
GDP 6.4 4.9 5.4 7.3 5.3 5.6
Private consumption 5.9 4.8 5.5 6.0 5.3 5.3 Public consumption 1.4 1.6 6.1 10.0 9.5 5.5 Gross fixed capital formation 1.3 (6.6) 1.4 9.5 8.0 6.8 Increase in inventory
(contribution to GDP growth rate)
1.2 (0.5) 0.2 0.0 (0.2) (0.6)
Exports, goods and services 15.0 4.8 11.2 3.1 2.8 5.0 Imports, goods and services 5.8 2.4 1.9 (5.4) 4.3 4.0
GNP 6.9 5.3 6.1 7.8 5.8 6.3
Net factor income from abroad 13.5 10.8 13.3 12.6 10.5 12.8 Exports (custom, US$, % y-y) 9.5 4.0 14.9 4.6 4.2 5.8 Imports (custom, US$, % y-y) 8.8 7.7 9.2 5.2 10.9 5.2 Trade balance (custom, US$bn) (4.4) (6.2) (4.4) (4.9) (8.7) (8.9) Current account (US$bn) 1.6 2.0 5.9 6.0 5.5 7.1 Current account (% GDP) 1.9 2.0 5.0 4.1 3.1 3.5
CPI (average) 6.0 7.7 6.3 2.8 4.1 3.7
91-day treasury bill yield (year-end) 7.8 5.2 4.8 4.2 3.50-5.50 3.50-5.50 P:US$1 (year-end) 56.3 53.1 49.0 41.2 38.0-43.0 36.0-41.0 Source: Nomura FERC, BSP, NSCB, NSO of the Philippines, CEIC data
Economics | Philippines Yuichi Izumi
Our view now versus three months ago
We reduce our 2008 real GDP growth forecast to 5.3%, from 5.7% three months ago, and our 2009 forecast to 5.6%, from 5.8% three months ago, due to higher crude oil prices and the growing risk of a US economic slowdown. We lift our 2008 CPI growth forecast to 4.1%, from 3.6% three months ago, and our 2009 forecast to 3.7%, from 3.5% three months ago.
Summary
We see an increasing risk of a slowdown in the Philippine economy, owing to higher crude oil prices and the heightened risk of a downturn in the US. We look for economic growth in the Philippines to continue slowing in the current year, with exports and private consumption both likely to cool. However, the economy should be supported by:
1) fiscal and monetary policy stimulus; 2) increased mineral exports on higher metal prices; 3) continued firmness in the Chinese economy; and 4) growth in remittances by overseas Filipino workers (OFWs). On 31 January, the Bangko Sentral ng Pilipinas (BSP) cut the policy interest rate by 25bps, its fourth cut in four months. We think the central bank could cut interest rates further if concerns of a recession in the US were to increase, or if strong peso pressure were to mount on a widening of the Philippine-US interest rate spread. We expect the peso to strengthen against the dollar at a slower pace going forward, as higher crude oil prices dampen growth in the current account surplus. But we still think the currency is likely to strengthen moderately, owing to the large flow of remittances from OFWs.
Real economy developments and directions
In 2007, real GDP growth accelerated to 7.3%, from 5.4% in 2006. This is the highest growth rate since 1976. From this lofty base we expect a gradual slowdown in 2008F, owing to higher crude oil prices and the risk of a US economic slowdown. But fiscal and monetary policy should act as a support, particularly in 2H08F.
We would expect a slowdown in the US economy to lead first to a softening of exports from the Philippines. The US is the largest recipient of Philippine exports, being the destination for 18.2% of customs-cleared exports in 2006. In January-November 2007, Philippine exports to the US were down 2.6% y-y, and its exports to Japan and Europe likewise weakened in sympathy with slowing economic activity in the US. Exports to China and Hong Kong have become an increasingly important portion of overall exports. In January-November 2007, exports to China and Hong Kong were up 40.8%
y-y. The likely slowdown in overall exports should be cushioned, at least in part, by continued strength in China’s economy in 2008F.
Real private consumption is likely to slow in 2008F, with higher crude oil prices taking a bite out of real household incomes. But we don’t see a sharp decline in private consumption, assuming continued growth in OFW remittances. Moreover, we expect capital and construction investment to be firm in 2008F, led by: 1) government spending on public infrastructure; and 2) increased capex in the expanding business process outsourcing (BPO) industry.
We lower our growth forecast due to higher crude oil prices and the risk of a US economic slowdown
Expect a slowdown in the Philippine economy
Higher crude oil prices and the risk of a slowdown in the US economy are the main concerns
Economics | Philippines Yuichi Izumi
Fiscal policy
The FY08 national government budget, which provides for increased investment in public infrastructure, secured the approval of the House of Representatives on 28 January. President Gloria Macapagal Arroyo is expected to sign the budget plan in early February, with disbursement of public infrastructure investment likely to get under way later in the same month. The president also approved a supplementary budget worth P75bn (1.1% of GDP) aimed at mitigating the impact of a US economic slowdown. Economic stimulus packages in the supplementary budget include an income tax cut for low-income earners, rebates for households consuming less than 200kW hours of electricity per month, and an increase in government spending directed toward the agricultural and education sectors. If Congress approves the supplementary budget, the impact of fiscal policy stimulus should increase, particularly in the second half of the year.
The national government’s fiscal balance has been improving more quickly than the government had targeted, owing to sales of government-held stocks. The fiscal deficit for 2007 came to P9.4bn, much lower than the P36.0bn deficit initially outlined by the government. Still, to stimulate the economy with the supplementary budget, the government could push back its target for a balanced budget to 2009F, from 2008F, since the supplementary budget is expected to be partly financed by additional sales of government-held stock and real estate worth P30bn. These revenues were originally earmarked for the planned balanced budget in 2008F.
Monetary policy and interest rates
Supply-side inflationary pressure has been mounting in the Philippines, stoked by rising oil prices. The CPI was up 3.2% y-y in November 2007, matching the year’s high (January 2007). We estimate every US$20/bbl increase in the Dubai oil price pushes up CPI growth in the Philippines by 1.9pp. Still, growth in the CPI should stay within the 3-5% range targeted for 2008F, since we expect inflationary pressures relating to higher crude oil prices to be countered, partly, by the marked strengthening in the peso against the greenback. We would expect inflation to ease in 2009F as the boost to prices from higher crude oil prices drops off.
On 31 January, the BSP lowered the policy interest rate by 25bps. If concern over the negative impact on the Philippine economy from a greater-than-anticipated slowdown in the US economy were to intensify, or if appreciation pressure on the peso were to increase owing to the widening of the US-Philippine interest rate spread following US Fed action, the BSP could cut interest rates further.
The 91-day Treasury Bill (T-Bill) yield continues to trade in the 4.0-4.5% range, in the wake of improvements in the fiscal balance and the BSP’s monetary easing efforts. We expect the 91-day T-Bill yield to rise gradually as inflationary pressures mounts, fuelled by higher crude oil prices. But the 91-day T-Bill yield should remain low, given the budget is likely to be balanced in 2008F; and 2) the BSP could yet lower interest rates again.
Forex policy and outlook
In 2007, the peso gained 19% against the dollar, the biggest increase of any major Asian currency. We see two main reasons for the recent upward pressure on the peso:
1) the growing current transfer surplus driven by growth in OFW remittances; and 2) increased portfolio investment by overseas investors, centred on equities. Looking at the balance of payments for the first nine months of 2007, the trade balance was in deficit by US$5.46bn as the value of imports rose on the surging crude oil price, but there was a current account surplus of US$4.17bn, owing to a large current transfer surplus of US$10.31bn. The capital account was also in surplus, by US$3.15bn, led by net portfolio investment inflows of US$2.81bn. Preliminary data for full-year 2007 show a surplus of US$8.57bn in the overall balance of payments (current account + capital account) — more than double the surplus of US$3.77bn for 2006.
The president approved a supplementary budget designed to soften the impact of a US economic slowdown
Balancing the budget may have to wait until 2009F
Higher crude oil prices stoking inflationary pressure
More BSP rate cuts still a possibility
91-day T-Bill yield likely to remain low
Strong peso appreciation
Economics | Philippines Yuichi Izumi
The government and BSP have taken a number of steps, such as forex intervention, interest rate cuts, relaxing rules on overseas investment, and curbing new bond issues in foreign currencies, aimed at reining in pressure that could lead to rapid peso appreciation. In 2008-09F, we expect the peso to strengthen against the dollar at a slower pace, as higher crude oil prices dampen growth in the current account surplus.
However, we still think the peso is likely to continue to strengthen moderately through 2009F owing to the ample flow of OFW remittances.
Risks
The risk of a slowdown in the US triggered by the sub-prime loan crisis is cause for concern for the Philippine economy. The Philippines is sensitive to overseas economic trends through its exports and OFW remittances. As noted, the US takes more
Philippine exports than any other trading partner (18.2% of customs-cleared exports in 2006), and based on estimates for 2004, 2.72mn Filipino workers live in the country (accounting for 33.7% of total OFWs). Hence, we think a US downturn would have a particularly large impact.
Structural developments
Debate about the constitutional change is coming to the fore again. Previously, the Arroyo administration’s position on reform had rested on shifting from a presidential to a parliamentary cabinet system. After growing criticism that this was merely an attempt to extend the life of the incumbent administration, constitutional reform has been on the backburner since the end of 2006. Political pundits note that the Arroyo
administration’s most recent proposal for constitutional change has switched again, from a parliamentary cabinet system to a federal system, likely as part of a bigger push to stem unrest in the autonomous Mindanao region.
Constitutional reform is likely to take some time. First, as the Arroyo administration has yet to make an official announcement, we think there is still a possibility that the parliamentary cabinet system could be included in any constitutional reform proposal.
Second, we think introduction of a federal system would require revisions to the tax code, including discussion on tax-raising powers, which would likely trigger even bigger problems than arose when the rate of VAT was raised in February 2006. Third, with support for the Arroyo administration falling, questions remain as to whether the government can win public support for a new reform proposal.
We look for moderate peso appreciation to continue in 2009F
Growing concern over risk of US slowdown
Issue of constitutional reform re-emerges
We expect constitutional reform to take some time
Economics | Philippines Yuichi Izumi