THE PHILIPPINES may find it challenging to achieve the government’s growth target of 6.5-8% next year, as tighter-for-longer policy rates may continue to dampen investment activity.
BMI Country Risk & Industry Research, a unit of Fitch Solutions, said the Bangko Sentral ng Pilipinas (BSP) may deliver one more rate hike this year before it starts cutting borrowing costs in the second half of 2024.
“Our current expectation is for the benchmark policy rate to be raised by an additional 25 basis points (bps) in the upcoming November meeting due to concerns over price stability,” BMI said.
The research firm said the robust third-quarter growth provided room for the BSP to continue tightening.
The Philippines grew by 5.9% in the third quarter from 4.3% in the second quarter. However, this was slower than 7.7% a year earlier. For the first nine months, economic growth averaged 5.5%, still below the government’s 6-7% full-year target.
After the better-than-expected third-quarter print, BMI raised its Philippine growth forecast to 5.7% this year from 5.3% previously. It sees the Philippines expanding by 6.2% in 2024, which is below the government’s 6.5-8% target.
“Subsequently, we think that the BSP will only cut rates in the second half of 2024, in line with our expectations for the US Federal Reserve,” BMI said, adding that the monetary cycles of the BSP and the US Fed have been closely linked since 2001.
The US central bank kept borrowing costs unchanged at 5.25-5.5% for the second straight meeting earlier this month. This was after it hiked policy rates by 525 bps from March 2022 to July 2023.
“A quick return to loosening before the Fed could not only de-anchor inflation expectations but exacerbate weakness in the peso. This means that restrictive financial conditions will continue to weigh on domestic activity for at least the first half of the year,” BMI said.
The Monetary Board is widely expected to keep the key interest rate steady at 6.5% at its policy meeting on Thursday, according to 15 of 18 analysts in a BusinessWorld poll conducted last week.
The BSP raised borrowing costs by 25 bps in an off-cycle move last month, bringing the key rate to a fresh 16-year high of 6.5%. The BSP has raised interest rates by 450 bps since May 2022 to fight inflation.
Meanwhile, Jean Olivia De Castro, head of fixed income at Manulife Investment Management and Trust Corp., said the BSP will keep rates steady for the rest of 2023.
However, high inflation and elevated interest rates may continue to be challenging for growth, she added.
“Despite a rebound in the third quarter, growth in household consumption has been steadily declining every quarter since last year as high inflation erodes households’ purchasing power,” she said in a note.
Household consumption grew by 5% in the third quarter, slowing from 5.5% in the previous quarter and 8% a year ago.
Meanwhile, gross capital formation declined by 1.6% in the third quarter, ending nine straight quarters of growth. This was a reversal of the 18.2% expansion a year ago and 0.3% in the second quarter.
Ms. De Castro said high policy rates discouraged the private sector from borrowing and dampened private investments.
“As we don’t expect the macroeconomic backdrop to change drastically over the next quarter, there remain downside risks to growth in the next few quarters,” she said.
Also, BMI said a global slowdown may lead to lesser demand for Philippine goods and services.
“Our global team is forecasting the world economy to expand by just 2.1% in 2024 compared to 2.6% in 2023. Crucially, the US and mainland China, which are the Philippines’ major trading partners, are set for a slowdown,” it said.
BMI said China may slow to 4.7% in 2024 from a likely 5.2% growth this year, while the US may enter a shallow recession next year.
“Both countries account for about 30% of Philippine total merchandise exports. This makes it exceedingly difficult for Philippine trade to stage a turnaround next year,” it added.
In the first nine months of the year, exports dropped by an annual 6.6% to $54.54 billion.
Despite the challenges, the Philippines is still seen to be one of the top performers in the region in terms of economic growth.
Mark Canizares, head of equities at Manulife Investment Management, said consumer spending remained stable despite elevated inflation.
Private consumption also sets the Philippines apart from regional neighbors that rely more on trade and tourism.
“In addition, the recent deceleration of inflation, as seen in November, and peaking interest rates could boost the Philippine economic growth trajectory into 2024,” Mr. Canizares said.
Easing inflation may also provide support for private consumption, BMI said.
“We continue to expect inflationary pressures to recede over the coming months. Our base forecast is for headline inflation to reach 4.7% by end-2023 before settling within the BSP target range of 2-4% in 2024,” BMI said. — Keisha B. Ta-asan