A day after Christmas 2018, the economy seemed to have shrugged the inflation woes it faced for the most part of 2018. The government has done a good job ensuring that prices of basic commodities, particularly rice, remain stable especially in this festive month of December. As the season is about to end, people now shift their attention to what is ahead. A better 2019 definitely is the battlecry of every person. If we are to look at the recent Consumer Expectations Survey released by the Bangko Sentral ng Pilipinas (BSP), we are seeing a weak sentiment entering the first quarter of 2019. People remain wary of high prices and lower income that they expect to persist through next year. Meanwhile, the counterpart Business Expectations Survey also reflected declines in business confidence in the coming first quarter of 2019. Cited as reasons are rising input prices, weak peso and higher interest rates.
Our analysis at the Ateneo Center for Economic Research and Development shows that the pulse of consumers and business alike are real challenges that could affect the projected economic growth for 2019 and beyond. As it is now clear that inflation in 2018 was for the most part caused by supply gaps, it is imperative that the government sustains its current approach in ensuring stable prices through the administrative orders on price monitoring, relaxation of import restrictions, among others. The anticipated passage of the rice tariffication bill into law is expected to ensure that rice will be available and affordable. The other perceived source of inflation was the surge in oil prices, which peaked in September this year. The geopolitical nature of oil has swung its prices from highs to lows and we are now benefiting from its low levels, forcing the government to rethink its earlier pronouncement of the suspension of the second oil tax increase under the Tax Reform for Acceleration and Inclusion law. Whatever the decision of government will be, it must ensure that no undue oil supply constraints will occur as people are now used to market-based oil prices. Our view is that inflation in 2019 will taper to average about 3.75. This is assuming that rice and other food commodities supplies are stable and that oil prices do not swing as much as it did this year.
A possible dampener in the economic momentum is the increasing trade deficit. While it is not necessarily bad for the economy to import heavily, particularly its capital and infrastructure requirements, the weak exports and its limited products has increased the deficit considerably. With remittances normalizing growth at about 3 percent and contributions from business-process outsourcing slowing to below double-digit levels and tourism still remaining below $10 billion, the fundamental value of the peso is pressured to weaken. We see it averaging to about 53.50 to 54 for 2019, from about 52.50 for 2018.
Interest rates, meanwhile, are already in the uptick since October 2018. However, as inflation starts to decline, we expect the BSP to no longer increase rates in the short term. Nonetheless, the non-passage of the 2019 Budget will force the national government to borrow more domestically in the first quarter, and this could push the 91-day Treasury bills to more than 6 percent. As it is, the 91-day Treasury bills are already in their five-year high of about 5.35 percent as of the middle of December. This is because of the fund requirements of the “Build, Build, Build” program and other committed expenditures that cannot be funded under a reenacted budget. Thus, it is imperative that Congress pass the budget soonest, otherwise this could result to a revaluing of corporate and household debts, which may eventually be passed on as higher prices by producers. The middle class, which entered into a number of consumer loans, particularly housing and vehicles, will be negatively affected by such a situation. This could put in jeopardy the decade-old outstanding nonperforming loans ratio of below 2 percent. Hence, it will be critical for the national government to bring back the short term interest rates to below 5 percent before another revaluation is made by the financial sector in the second quarter.
What about the GDP growth? Our view is that for 2018, the growth will be 6.3 percent at best. This is not necessarily bad, though it is indeed slower than the past five years. A recent paper by the Asian Development Bank showed that the Philippines is growing at just about its potential growth. For 2019, we expect it to grow at about the same rate, assuming interest rates will not go beyond 6 percent for the rest of the year and it might even go to 6.5 percent due to election spending. All told, the growth momentum will continue and the sooner the infrastructures are completed, the higher the potential growth will be. Here is wishing everyone a better 2019 indeed!