Business World
Introspective
The Public Sector. Fiscal performance has been quite impressive from the point of view of financial markets with a lower-than-expected budget deficit for 2010 (P314.5 billion versus a P325-billion target) and 1Q2011 (P26.2 billion versus a P112-billion goal). Many are now anticipating a credit rating upgrade, particularly by Fitch Ratings which places Philippine sovereign debt at two notches below investment grade, renewing optimism in debt markets.
However, the good numbers to an extent came at the expense of a pullback in spending. In the first quarter, the national government's non- interest expenditures summed to only P258.6 billion or P71.5 billion lower than the programmed amount. The public works department, which is assigned a bulk of the funds, attributes this outcome to the need to suspend questionable projects as well as to the short pipeline for new state investments.
That said, there is now very little doubt about the ability of the new fiscal leadership to meet this year's deficit target, with the consensus forecast closely in line with the government's own goal (3.2% of GDP). Bolstering this belief as well is the expectation that the run-up in crude oil prices would lead to a VAT windfall.
Whether or not the government can meet its subsequent deficit targets is the bigger question (2% of GDP by 2013). The Aquino administration had previously vowed no new taxes for 18 months starting from when it took over in July last year, and winds may now be shifting according to senior fiscal officials we have talked to recently. A bill reforming sin tax measures with a yield of anywhere between P50 to P100 billion will reportedly be filed by January next year. In the meantime, rationalization of fiscal incentives will also be pushed by the current fiscal leadership. The proposed measures should help nudge up the country's tax effort ratio, which remains stuck below 13% as we had expected (12.8% in 2009 and 2010) with the application of several revenue-eroding laws.
EXTERNAL ACCOUNTS PRESSURES
Taking into account the impact of political turmoil in the MENA region and the Japan nuclear crisis brought on by the disastrous earthquake last March, central bank economists had cut their forecast for growth of remittances, which account for the bulk of the country's current account surplus, from 8% to 7% this year - the same as our own forecast - and to about 5% next year.
We maintain confidence in the resilience of remittances and also of services exports (specifically BPOs) in spite of external shocks given the structural factors that support it. This year, as in 2008 when crude prices shot up, the pressure will be on the goods trade balance as an anticipated reversal of the technology cycle exacerbated by the downturn in Japan occurs in tandem with a ballooning oil import bill, with Dubai fateh prices possibly averaging at about $110-$115 per barrel.
For this reason, we now expect a smaller current account surplus of around 3.3% of GDP this year from our previous forecast of 4%. If the uptrend in oil prices continues next year and dampens global outlook, it is unlikely the current account could improve by much and would probably still settle at below 4%.
POPULARITY DIPS
Net satisfaction ratings of the government under President Aquino dipped in the latest survey conducted by the Social Weather Stations, but were still pretty high by historical standards, only falling from very good to good. The state of the economy apparently still occupied people's minds, with the lowest scores again given in the area of ensuring no hunger and fighting inflation, for which the new administration had been given neutral marks.
President Aquino recently mentioned that he wants to appoint former senator Mar Roxas, his running-mate in last year's elections, to a Cabinet- rank position with a job that resembles that of a chief of staff. There are concerns that this would create frictions with the current executive secretary given the likely overlap of functions.
We do think the idea of tapping a political heavyweight like Mr Roxas with high credibility in the business sector as a vocal ally would do the President some good, particularly in terms of firmly consolidating political hold to get much-needed economic legislation through. That means finding Mr Roxas a better job than chief of staff, a job that connotes routine work, and one instead that can project him as a modern problem solver with great executive skills.
FACING STRONGER HEAD WINDS
GDP grew by 4.9% in 1Q11, just barely hitting the tail end of the government's 4.8% to 5.8% forecast. This is the lowest GDP growth since 4Q09 and continues a trend of declining growth since 1Q10. As we predicted, a slowdown in government spending compared to the pre-national election quarter last year, as well as lackluster trade due to rising oil prices stemming from the political turmoil in MENA, were cited as the main culprits for the lower growth.
On the expenditure side, the economy was carried by a remarkable uptick in capital formation (37%) as well as a steady advance in personal consumption (4.9%). A plunge in government consumption by 17.2% and reversal of net exports into deficit from surplus dragged the economy down.
Though growth was respectable, it is far from impressive. The remarkable capital formation growth was in large part accounted for by change in stocks, a very volatile component of the income accounts, excluding which capital formation growth was a substantially lower though still decent 12% - durable equipment grew 16.7% and intellectual property rights 10%.
At this time, we are still sticking to our projection of 4.8% growth for the year, though it is obvious the economy now confronts stronger head winds. The woes in MENA combined with the continued sluggishness in Europe, point to remittances remaining relatively flat in the short term, indicating it may just be a matter of time before it starts dragging down personal consumption.
This is a summary of the May 12 Global Source Quarterly Report and a May 31 Market Brief written by Margarita Gonzales, Geoffrey Ducanes, and this columnist. Global Source is a New York-based network of independent analysts whose subscribers are mostly fund managers and banks.
Monday, June 6, 2011
Stirred, not shaken (Part 1)
Business World
Introspective
Unwanted shocks have hit the Philippine economy since the start of the year, starting with political turmoil in the Middle East and North African (MENA) region that has disturbed world oil markets followed by a destructive earthquake in Japan resulting in a nuclear crisis, the after effects of which continue to pose a risk to the rest of Asia. Upon closer inspection, the impact of these events coupled with domestic inertia leads us to lower our growth forecast for the country from 5.3% to 4.8% this year.
While we have brought down our growth expectations, the central scenario for the economy would remain manageable in our view. We are still expecting oil prices to stabilize by 2012. Thus far, double-digit inflation seems unlikely to set in especially with good harvests helping to keep food inflation down. We also believe that spillovers to domestic economic activity due to disruptions in Japan's production as well as curtailment of Japanese demand will not last for very long especially with a massive reconstruction effort underway.
OPTIMISM DECLINES
The country's national income accounts are set to be released end of the month (May 30) and while growth is widely expected to weaken this year, analysts believe some momentum from last year would still be felt in first- quarter growth numbers. Top indicators from the leading economic indicators index released by the National Statistical Coordination Board suggesting a slowing economy moving forward were the terms-of-trade index, which had a negative relationship with GDP, and the number of new businesses created.
We are similarly starting to get more worried about the threat posed by rising commodities costs, especially of oil, given the impact on net exports, which already showed signs of a slowdown as the electronics business cycle reversed course and will likely to be further weighed down by the Japan nuclear crisis, as well as the relatively high pass-through to domestic prices because of the absence of subsidies. While we find double- digit inflation highly unlikely, the uptick in the CPI would surely be a dampener to consumer and business confidence.
Already, a survey conducted by the Bangko Sentral showed a sharp decline in consumer expectations during the period on account of sustained increases in petroleum prices, more expensive goods and services, and a general increase in household expenses. Growth of remittances in peso terms, meanwhile, continued to be dragged down by the domestic currency appreciation trend, taking further steam out of private consumption which comprises the bulk of GDP (about 80%).
With the national government still exhibiting unusual spending restraint, conspicuously failing to front-load infrastructure spending during the first quarter despite early passage of the budget, and public- private partnerships not expected to make a strong impact for the year at least, we are becoming less and less optimistic that growth of above 5% can be achieved this year. We are thus bringing down our growth forecast for 2011 from 5.3% to 4.8%, though tentatively maintaining projections for 2012 at 5.5%.
FIGHTING INFLATION
After appearing to stabilize in March, inflation re-accelerated to 4.5% in April. Core inflation, which excludes the impact of volatile food and energy items (e.g., rice, gasoline and other fuels), also quickened from 3.5% in March to 3.8% in April. With inflation likely to peak around the fourth quarter, we continue to expect further monetary adjustments before the year ends, via policy rate increases or tweaking the reserve requirements.
Inflation jitters have seemingly subsided in financial markets, with peso bond yields, in particular, seen sliding since March. The benchmark 91-day T-bill dropped to a historical low of 0.57% in the last auction (May 2). Albeit with still greater preference for shorter tenors, bonds have generally rallied owing to the perceived good fiscal picture under the new administration, robust foreign inflows due to interest differentials and consequently high market liquidity. Yields may remain low especially with the rising expectation that the budget deficit will be contained and with only moderate monetary tightening, though inflation could still be a latent risk.
We now see the peso-dollar rate ending year at around P42/$ with support provided by a still positive current account balance, a higher interest differential, and possible appreciation bias by monetary authorities to counter the effect of an escalation in commodities prices.
(To be continued)
This is a summary of the May 12 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.
Introspective
Unwanted shocks have hit the Philippine economy since the start of the year, starting with political turmoil in the Middle East and North African (MENA) region that has disturbed world oil markets followed by a destructive earthquake in Japan resulting in a nuclear crisis, the after effects of which continue to pose a risk to the rest of Asia. Upon closer inspection, the impact of these events coupled with domestic inertia leads us to lower our growth forecast for the country from 5.3% to 4.8% this year.
While we have brought down our growth expectations, the central scenario for the economy would remain manageable in our view. We are still expecting oil prices to stabilize by 2012. Thus far, double-digit inflation seems unlikely to set in especially with good harvests helping to keep food inflation down. We also believe that spillovers to domestic economic activity due to disruptions in Japan's production as well as curtailment of Japanese demand will not last for very long especially with a massive reconstruction effort underway.
OPTIMISM DECLINES
The country's national income accounts are set to be released end of the month (May 30) and while growth is widely expected to weaken this year, analysts believe some momentum from last year would still be felt in first- quarter growth numbers. Top indicators from the leading economic indicators index released by the National Statistical Coordination Board suggesting a slowing economy moving forward were the terms-of-trade index, which had a negative relationship with GDP, and the number of new businesses created.
We are similarly starting to get more worried about the threat posed by rising commodities costs, especially of oil, given the impact on net exports, which already showed signs of a slowdown as the electronics business cycle reversed course and will likely to be further weighed down by the Japan nuclear crisis, as well as the relatively high pass-through to domestic prices because of the absence of subsidies. While we find double- digit inflation highly unlikely, the uptick in the CPI would surely be a dampener to consumer and business confidence.
Already, a survey conducted by the Bangko Sentral showed a sharp decline in consumer expectations during the period on account of sustained increases in petroleum prices, more expensive goods and services, and a general increase in household expenses. Growth of remittances in peso terms, meanwhile, continued to be dragged down by the domestic currency appreciation trend, taking further steam out of private consumption which comprises the bulk of GDP (about 80%).
With the national government still exhibiting unusual spending restraint, conspicuously failing to front-load infrastructure spending during the first quarter despite early passage of the budget, and public- private partnerships not expected to make a strong impact for the year at least, we are becoming less and less optimistic that growth of above 5% can be achieved this year. We are thus bringing down our growth forecast for 2011 from 5.3% to 4.8%, though tentatively maintaining projections for 2012 at 5.5%.
FIGHTING INFLATION
After appearing to stabilize in March, inflation re-accelerated to 4.5% in April. Core inflation, which excludes the impact of volatile food and energy items (e.g., rice, gasoline and other fuels), also quickened from 3.5% in March to 3.8% in April. With inflation likely to peak around the fourth quarter, we continue to expect further monetary adjustments before the year ends, via policy rate increases or tweaking the reserve requirements.
Inflation jitters have seemingly subsided in financial markets, with peso bond yields, in particular, seen sliding since March. The benchmark 91-day T-bill dropped to a historical low of 0.57% in the last auction (May 2). Albeit with still greater preference for shorter tenors, bonds have generally rallied owing to the perceived good fiscal picture under the new administration, robust foreign inflows due to interest differentials and consequently high market liquidity. Yields may remain low especially with the rising expectation that the budget deficit will be contained and with only moderate monetary tightening, though inflation could still be a latent risk.
We now see the peso-dollar rate ending year at around P42/$ with support provided by a still positive current account balance, a higher interest differential, and possible appreciation bias by monetary authorities to counter the effect of an escalation in commodities prices.
(To be continued)
This is a summary of the May 12 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.
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