The financial-services giant HSBC ramped up yet again the country’s local output growth, measured as the GDP, to 6.7 percent in 2017 from only 6.5 percent announced 12 months earlier.
The ramping up extends to growth prospects this year when the $305-billion economy was seen sustaining the pace of expansion also at 6.7 percent.
HSBC economist Frederic Neumann and colleague Qu Hongbin, in scanning the output potential of economies across Asia, said the Philippines “stands on solid ground as one of Asia’s growth leaders, and it will likely stay in that position in 2018, as well.”
“The country contributed to Asia’s host of upside surprises on growth in Q3 2017, expanding an impressive 6.9 percent year-on-year [YOY] [Q2: 6.7 percent]. The composition of this growth suggests that the country is firing on all cylinders, with all expenditure components contributing positively for the first time since 2014,” the duo said.
They traced the continuing expansion to strong private consumption and fixed investment as the main growth driver, noting that the former contributed 3 percentage points, while the latter contributed a separate 2 percentage points to growth in the third quarter when the economy delivered growth averaging 6.9 percent.
“But there are more encouraging signs in the data. Government spending has been a substantial contributor to growth this year, adding 0.9-percentage point in both Q2 and Q3, far above the long-term trend of 0.4 percentage points. This is an important development, if it persists, as it could suggest that the government is finally curbing its historical pattern of under spending,” the duo added.
However, the duo threw a word of caution on prospective expansion, noting particularly the moderation happening in fixed investment, “which slowed for the fifth straight quarter in Q3.”
“We focus particularly on the construction sector, where the private sector accounts for about 80 percent of the total figure. Private construction grew just 0.6 percent YOY in Q3 [Q2: 5.1 percent], while public construction picked up some of the slack, growing 12.6 percent YOY [Q2: 12.1 percent].
“This is due partly to the government’s shift away from public-private partnership projects. We expect public construction to expand further in 2018 as the government embarks on a more aggressive infrastructure program and boosts infrastructure spending to 7.2 percent of GDP by 2022. However, private construction will need to remain a steady contributor to investment, or it could become a drag on growth in 2018,” the duo said.
The country’s forecast growth in 2017 and the year ahead compares favorably against forecast expansion in China, whose supersized economy was seen expanding at the same 6.7-percent growth rate.
HSBC noted that China’s continued expansion in 2017 and the year ahead may prove slightly lower than previous as construction there has slowed and Chinese regulators have begun a tightening cycle.
China’s rapid growth had been made possible by massive lending in the past until last year, when regulatory measures were adopted in earnest that caused real-estate investments to dip and for local government spending, which have been similarly massive, to ease by a significant degree.
“Swifter and more determined state-owned enterprise restructuring could also curb industrial employment and weigh on consumption, at least at the margin. Still, HSBC believes other sectors, such as high-tech investment and services, will take up the slack, along with decent export growth. That should keep GDP expanding at 6.7 percent on average in 2017, roughly the same pace as in the third quarter,” the duo added.
They also noted that inflation has proven well-behaved during the period, averaging well within the target of 2 percent to 4 percent at only 3.2 percent in the first 11 months, based on data from the Bangko Sentral ng Pilipinas (BSP).
As a result, the lender said the BSP was likely to keep the rate at which it borrows from banks and financial institutions steady at 3 percent for now, although the same may be raised to 3.25 percent in the April-to-June quarter.
“We thus expect the BSP to hike the reverse repo rate by 25-basis points in Q2 2018, to 3.25 percent, to prevent any unanticipated rise in inflation toward year-end. If this were to happen, however, we believe it would be a shallow hiking cycle and done only to moderate inflation pressures and to close the gap between the weighted average of the term-deposit facility rates, which is around 3.5 percent, and the reverse repo rate. After this initial hike, we do not expect another policy rate hike until Q3 2019,” they said.
As to what could jeopardize the economic gains achieved thus far, the duo cited the possible failure to break ground on key infrastructure projects going forward when the government under President Duterte “reverts to its historical under spending.”
“A realization of those risks could reduce investor and business confidence and drag down growth. Moreover, recent labor statistics suggest that the country’s workforce is gradually shifting from agriculture to construction in an effort to take part in the government’s infrastructure push. This has led to a recent uptick in male unemployment. For now, we believe this development is largely transitory and frictional in nature, but it poses downside risks to growth if the economy is unable to absorb these workers and/or the government is unable to fully realize its infrastructure plan,” the lender said.