Philippines on track for strong growth in 2019: Citi

Economic growth in the Philippines is expected to be 6.5 per cent in 2019, up from an estimated 6.3 per cent in 2018, as inflation declines to moderate levels, Citi Research said in a Jan 14 report. Household consumption remains supported by overseas remittances and wage growth. Fiscal spending is expected to remain strong, especially with a good pipeline of infrastructure projects, while more memoranda of understanding signed with Japan and China suggest further improvement of economic ties and sustained momentum of the government's Build, Build, Build infrastructure plan.

Lowered inflation forecast

With December 2018 inflation surprising on the downside and a subdued crude oil price outlook, Citi has revised its Philippines inflation forecast down further to 3.2 per cent for 2019, from a previous forecast of 3.5 per cent, in a marked decline from 2018's 5.2 per cent inflation. But the policy rate is expected to remain unchanged at 4.75 per cent in 2019, as inflation is expected to be close to the mid-point of the 2019-2020 inflation target. The central bank is expected to cut the required reserves ratio further by 200 to 300 basis points in 2019 to provide sufficient liquidity to the banking system.

Current account deficit unlikely to improve

Citi has revised its current account deficit higher, to 2.3 per cent of GDP for 2018 -- up from a earlier 1.5 per cent estimate -- and 2.1 per cent of GDP for 2019, up from 1.3 per cent. This was after the current account surprised significantly on the downside with a US$6.5 billion deficit for the first three quarters of 2018, compared to a US$1 billion surplus in the year-ago period. With strong domestic investment but subdued goods exports and only a moderate outlook for remittances, the current account deficit is "unlikely to improve any time soon", said Citi. Downside risks to the peso thus persist, despite support from a higher policy rate and declining inflation.

Political considerations

After delays in Q4 2018, the legislature continues to face challenges in passing the budget bill and a second tax reform package by Q1 2019. Applications for investment promotions and foreign direct investment flows had slowed around September and October 2018, partly due to tax reform and global economic uncertainties. The mid-term election due on May 13, 2019 may mean more spending ahead, but politics could also prove a distraction and delay economic reform, said Citi. Though polls show the pro-government camps in the lead and the president's public approval rate improved slightly in Q4 2018, uncertainties remain.