Newsletter

Breaking records – the Philippines’s economic performance for the first half of the year “breached
records”, but not in the best sense of the term. Prices of general goods and services overshoot targets,
while the country’s gross domestic product (GDP) growth missed estimates.

Missing Targets

The economy grew to its slowest pace in three years at 6% in 2Q18, both below the revised 6.6% GDP
growth in 1Q18 and median estimate of 6.6%. 1H18 GDP grew by 6.3%, also below the government’s 7-
8% target for 2018. This means that the economy would have to expand by at least 7.7% in the second
half for the government to achieve the low-end of its target range for the year. Reaching this target will
prove to be difficult, especially as 3Q17 was particularly a high base with the economy growing by 7.2%.
In fact, Budget Secretary Diokno himself admitted that PH will probably miss its growth target this year.

Meanwhile, inflation averaged at 4.5% in the first half, missing Bangko Sentral ng Pilipinas’s (BSP) 2-4%
target. The surge showed no signs of slowing down as inflation continued picking up for the 9th
consecutive month on a YoY basis last September, breaching a 9-year high at 6.7%. This warranted a
strong monetary response, pushing the BSP to hike rates by another 50 basis points to 4.5% on its last
meeting. We have yet to see the peak though – despite raising rates, the BSP still expects inflation to
breach targets until 2019, with inflation expectations at 4.3%.

Moving Forward

While PH remains to be one of the fastest growing economies in Asia (just behind Vietnam and China),
concerns on the country’s rising inflation, widening deficit, and weakening currency have led some
economists to revise down their growth forecasts. World Bank, Asian Development Bank, and the
International Monetary Fund have slashed their growth projections for the year.

Though the government is taking strong monetary (rate hikes) and non-monetary (rice tarrification bill)
actions to dampen inflation, prices would likely remain elevated, especially as global oil prices just
recently hit its highest since 2014. This, together with the agricultural damage brought by the recent
typhoon Ompong, would put further pressure on prices of goods and services.

In this light, we expect to see the same story on the second half. Rising oil prices coupled with rice
supply woes will keep inflation near 7% in the last months of 2018. Tighter monetary policy and higher
prices of goods will continue to weigh on consumer spending, which should dampen growth as this
accounts for about 70% of the economy. Overall, concerns on macroeconomic drivers will continue to
weigh on the economy in the near term.

However, all hope is not lost. These concerns maybe short term “growth pains” that the country goes
through as PH rebalances the economy towards more sustainable sources. Driven by investments in
infrastructure and capital formation, growth is expected to pick-up going forward. But in the meantime,
the country’s economic managers must remain vigilant on addressing these issues to fully restore
investors’ confidence in the economy.