Business World
Introspective
The Philippines witnessed surprisingly roaring growth in 2010 befitting a tiger year, but may see a tamer economy this year, now supposedly belonging to the rabbit. That is what believers in Chinese astrology would probably say about 2011. But from our point of view, entering the New Year may also be like going down the rabbit hole, not entirely sure if one would run into a lot of good surprises or be hit by more of the very bad ones.
The best state of course would be if the global economy beats expectations yet still runs at a pace that doesn't put too much pressure on commodities prices and if the current political uprising in Egypt (which has now spread elsewhere in the region), which could be the much-feared black swan event, would find swift resolution and thus prevent further volatility in the world oil markets. This way, with macroeconomic conditions remaining benign, remittances from overseas workers and hence consumption would still find room to grow while exports and private investment could continue to expand.
The worst state would be the opposite - that is, the remote case of global growth especially in advanced economies again slumping even as financial and political turmoil erupts in the Middle East because of contagion and leads to a rocketing of oil prices, raising costs, and impeding growth elsewhere in the world. With this backdrop, the strategy of holding back on spending to reduce the national deficit would seem like an inadequate approach while a strong effort for fiscal reform would be that much harder to launch. Such a scenario would also mean a hard fight against inflation and a deterioration of financial conditions.
Forecast Summary
Global Source
2011 2012
GDP annual change % 5.3 5.5
CPI inflation % 4.3 4.2
Benchmark interest rate % 4.8 4.8
Exchange rate PHP/USD 43.0 42.2
Fiscal balance/GDP Unit -3.3 -3.0
Current account/GDP Unit 4.0 4.4
International reserves USD bn 64.0 68.0
External debt/GDP % 30.0 27.5
Fortunately, the base case, while holding some uncertainty, would be a bit easier to face. As discussed in sections below, we see the economy growing at a softer yet still quite robust pace with price risks likely to be contained.
A SOFT YEAR AHEAD?
We had already adjusted our projections for 2011 upward to 5%-5.5% in a previous report in light of then quite high business confidence, robust remittances, strong corporate earnings, and quite benign macro environment. While the economy roared in 2010, growing by 7.3%, and there may still be some momentum left from last quarter's 3% quarter-on-quarter growth, there does not seem to be strong drivers in the horizon. Thus, our forecast range should hold for the meantime.
INFLATION FEARS
Factoring in the latest developments in global commodity markets, our own simulations place average inflation at about 4.3% this year and 4.2% the next, though with substantial upside risk. While oil markets have suffered some volatility and food price indexes have surged, the world price of rice, the more important food commodity in the Philippines (with 9.4% weight in the CPI) and thus closely watched because of its capacity to unhinge inflation expectations, seems fairly stable for now at half of peak levels scaled in 2008. With the US Fed on hold, we continue to look for policy rate hikes around the second half of 2011, the earliest being June when headline inflation starts to climb to the upper edge of the targeted range with a possible breach around the fourth quarter before falling back into the band. Tightening will likely be in the order of 75 to 100 bps (in 25 to 50 bps increments) for the year.
THE PUBLIC SECTOR
The government is hoping to cut the deficit to 3.2% this year (to about P290 billion) and further down to 2% by 2013. But because of the effect of several revenue-eroding laws. the likelihood remains that targets will again be met by expenditure compression despite some bright spots on the privatization front, meaning increasingly less funds for needed social services and infrastructure going forward. Looking ahead, we expect fairly good results for the country's debt ratio, which should remain on a downward trajectory over the next couple of years despite possibly higher domestic interest rates and low primary surplus owing to continued growth and peso appreciation.
NO REPEAT OF BOP HIGH
We are less sure that the substantial external surplus in 2010 can be repeated this year. Remittance growth, while remaining robust, will likely edge a bit lower this year owing to lower deployment of overseas workers over the past year. The export recovery may have already lost steam, with electronics exports, which account for about two-thirds of the total, rising by just 8% annually in November after growing at high double-digit pace since December 2009. Also, while the emerging market story may still be a convincing one for global investors given still comparatively high prospects for growth, tremors in the world commodities markets, particularly oil, may increase risk aversion and weaken or even reverse positive sentiment with many developing economies highly sensitive to changes in food and fuel prices.
POLITICS: STILL ON HONEYMOON
Judging from what the pundits have been saying, one would think the political honeymoon for Benigno Noynoy Aquino six months into the presidency is nearing its end. Not so if one bases conclusions on the recently released survey of the Social Weather Stations, a non-profit social research organization, which still saw the fairly new administration receiving historically high (very good) net satisfaction ratings. Mr Aquino will eventually be forced to take a more active approach to governing as every honeymoon has its expiration date. On economic affairs, an issue he would need to handle would relate to growing concerns over food and fuel inflation, an area where he got a neutral score - already his lowest - in the recently released net satisfaction survey.
This is a summary of the Feb. 8 Global Source Quarterly Report written by Margarita Gonzales, and this columnist. Global Source is a New York- based network of independent analysts whose subscriber base are mostly fund managers and research units of banks.
