Policy quadrilemma

Business World
Introspective

IN A repeat move, the Monetary Board last week brought down the rate on its Special Deposit Accounts (SDA) while keeping key borrowing and lending rates steady. The latest 50bp reduction brings returns on SDAs to 2.0% which, added to the previous cut, will save the BSP over P20 billion in interest costs over a one-year period on about P1.9 trillion parked in SDAs.

While acknowledging the beneficial impact on BSP's bottom line, monetary authorities have also been quick to point out that the SDA rate cuts have not been done solely to slow the bleed in its income position. Rather, the official line is that the cuts are intended to push monies out for more productive uses and are part of plans to go into an interest rate corridor approach to conducting monetary policy.

But the large cash drain is hard to ignore. The official Web site shows that the BSP has accumulated losses reaching 1.7% of GDP in the three years to November 2012 and these have eaten into its capital which has fallen from over P200 billion in 2009 to only P58 billion as of the period. At the same time, similar to some other central banks, it is accounting for paper gains or losses by reporting these as either a net asset (e.g., if peso appreciation reduces the value of the international reserves) or a net liability (if a net gain), rather than charged directly to capital. November 2012 data show that these revaluation losses amounted to P55 billion, which if deducted from capital leaves a net worth of P3 billion. This has since been boosted by a P20-billion capital infusion by the national government towards the yearend.

Nevertheless, considering continuing quantitative easing by major central banks, analysts have started to ask whether the BSP can hold the line and if its mounting costs and expectations of negative capital would influence policy decisions. In the context of the impossible trinity (i.e., one cannot enjoy policy independence, exchange rate stability and capital mobility all at the same time), the question is which one will it have to let go?
It is easy for market players to forget that unlike commercial banks, central banks are not out to make profits albeit they are inherently profitable. As the issuer of the currency and depository of banks' reserve requirement (both these liabilities are equity-like), they fund asset purchases at virtually zero cost. Moreover in carrying out policy operations, they are in the position to borrow when interest rates are low (to mop up excess liquidity in a cash-rich situation) and lend when rates are high (to inject liquidity). Hence, the orthodox view in economics is that a central bank's financial position does not form part of the policy- making equation and that negative capital is meaningless since it can always just print money to erase the losses as long as it is willing to tolerate higher inflation.

While this may well be the textbook case, real world conditions make the central banker's task more complicated. In the recent case of the Philippines, the net losses stem from monetary authorities' efforts to achieve the twin policy goals of currency and price stability in an environment of easy money globally. With a robust current account position to start with, the large inflow of yield-seeking foreign funds and ensuing BSP action to minimize sharp peso appreciation and mop up excess liquidity have dramatically changed its balance sheet structure.

The BSP is not alone in this. One can find many examples of central banks around the world that periodically incur losses or even at some point operated with negative capital for long periods of time (e.g., Czech Republic, Chile) without raising concerns about their credibility and effectiveness to carry out policy. After all, central banks do have seigniorage revenues from currency issuances and cost-free RR deposits. In the case of the BSP, one estimate is that based on current inflation and economic growth outlook, it can fund additional, moderate increases in foreign reserves from seigniorage without prices spiking beyond its tolerance range.
And despite what looks like depleted capital on paper, the BSP in reality has a sound balance sheet that in times of stress in the external accounts when central bank strength and credibility is most needed will automatically improve with the peso's depreciation. At that point, it will also be able to sell its dollars at a profit and the decline in its reserve holdings will help reduce the negative carry. Cuts in the policy rates and signals of more cuts ahead suggest to us that indeed, its losses have entered the policy equation. But given the above, this is unlikely to have been driven by economic considerations but, due to its history, by political and reputational risks of being perceived as having weak finances.

What then moving ahead? How will the BSP resolve its policy trilemma or rather, quadrilemma?
The BSP will likely favor instruments and policies that limit its losses, including measures that reduce the running losses on its negative carry such as lowering the SDA rate which the Governor has hinted at or resorting to using the reserve requirement on bank deposits, which are non- interest bearing, to fund asset purchases (either raising the existing ratio or imposing RRs on trust products).

The risk with bringing the SDA rate even lower is the potential for asset bubbles in the already frothy stock and property markets. Considering that SDA volumes have continued to rise, it is not clear at this point if and by how much the interest rate cuts will whet investors' risk appetite especially since bond yields are already dropping in anticipation of more cuts. But a safe assumption is that a portion of any SDA withdrawals will be used to fund increased government domestic borrowings, or in the case of foreign funds that have circumvented the BSP ban, their exit will contribute to a weaker peso and thus will be good for the BSP's books. Still, if the lower rates induce banks to lend too aggressively, the BSP may then switch to raising reserve requirements apart from tightening prudential limits further.

On the other hand, if heavy capital inflows persist despite the rate cuts, BSP may tolerate a larger peso appreciation, i.e., reduce its dollar purchases from the market and its associated sterilization. Already, it has passed some of the burden of keeping the exchange rate competitive, a public policy objective, to the national government (NG) with the latter prepared to exclusively tap the local market for its (re)financing requirements this year. The NG can do more, e.g., by speeding up infrastructure investments (or approvals for private investments) which will help raise the demand for dollars or encourage the two government-run pension institutions, GSIS and SSS, to invest overseas, which is allowed under their charters. At the same time, in light of apparent closer coordination and the NG's improved fiscal position, the BSP and NG can also work out other arrangements, including seeking new legislation.

There are also talks of creating a sovereign wealth fund that will allow a portion of the BSP's international reserves to be invested in riskier assets that earn higher returns, which can help narrow if not close the negative carry. Increasing the BSP's capitalization by law is also being considered. Legislating a capital/net worth band-an automatic top-up if BSP capital falls below the lower end of band, and an automatic payout to the national government whenever it exceeds the top end - as now being discussed in our FINEX policy study group, may well be the definitive solution to this fourth corner of BSP's quadrilemma.

Part of this column came from GlobalSource Market Brief, with the same title, written by Christine Tang and the columnist. Romeo Bernardo is a board director of IDEA. He served as Undersecretary of Finance during the Aquino 1 and Ramos administrations.

Why is the debt ratio rising?

Business World
Introspective

THERE HAS been a fair amount of curiosity directed at the government's announcement that the national government's debt stock rose 9.8% in 2012, translating into a higher 51.4% ratio to GDP from 50.9% previously. The puzzlement stems from observations that given a primary surplus, a higher GDP growth vs. interest rate and the peso's appreciation, the debt ratio should have fallen markedly. So why did it increase?

A decomposition of the increase in the national government (NG) debt level from 2011-12 shows a significant buildup in cash based on available data up to November. To us, this reflects a familiar pattern among large local borrowers who have recently been taking advantage of favorable domestic credit conditions to lock in cheap financing for expected expenses in the near term. The treasury bureau raised a record P188 billion from the sale of retail treasury bonds last October, with the 25-year debt papers yielding a low 6.125%.

In informal exchanges through e-mail, National Treasurer Rosalia de Leon explained that the cash pile is intended for a number of upcoming operations. These include:

On-lending to the Power Sector Assets and Liabilities Management Corp. (PSALM), the corporation tasked to oversee government's exit from the power generation business under the Electric Power Industry Reform Act.

This is not unusual. The NG occasionally borrows on behalf of public corporations to keep borrowing costs for the entire public sector down. This was done last year with the Treasury extending P55 billion to PSALM, which contributed to the rise in the debt ratio. A direct government borrowing saves at least 25 bps compared to a PSALM one with a sovereign guarantee. For 2013, a similar amount is expected to be on-lent to PSALM.

Buying back $1.5 billion worth of high-coupon dollar denominated bonds. Retiring expensive, short-dated, foreign currency-denominated and illiquid debts has been a key component of government's debt management program to help reduce its debt servicing costs and lower currency and roll-over risks, including by lengthening the maturity and liquidity profile of government securities. However, these benefits come at the cost of somewhat elevating the reported debt stock, a cost that government is able to bear at this time given the fiscal space created under this Administration.

For example, in late 2012 government spent $1.46 billion buying back $1.2 billion worth of securities. The higher cost may be traced to the price premiums attached to the retired bonds which carried higher coupons relative to the then prevailing market interest rates. Because a portion of the payment was sourced locally with dollars bought from the BSP, the transaction additionally helped to reduce appreciation pressures on the peso.

The remainder is programmed to be contributed into the bond sinking fund for maturities in early 2013.
On the whole, we think that the rise in the debt ratio is not a cause for worry and should not prevent government from getting its much desired investment grade rating. Based on the Treasury's deposits with the BSP as of November, netting out the cash as is standard practice in debt analyses in private companies should see government's debt ratio last year drop below the 50% posted in 2011.

More importantly, government has a much improved debt profile since 2005 in terms of sourcing, currency and maturity as well as a sizeable drop in interest costs relative to revenues. Overall, these translate into more sustainable debt dynamics and reduced vulnerability to interest and exchange rate shocks.

This column was excerpted from a GlobalSource Market Brief with the same title written by Christine Tang and the columnist. Romeo Bernardo is a board director of the Institute for Development and Econometric Analysis. He was Undersecretary of Finance during the Aquino 1 and Ramos administrations.

The 'Strong' Peso Problem

Business World, Introspective

In its latest attempt to deal with speculative inflows, the Bangko Sentral ng Pilipinas (BSP) capped in the last days of last year, individual banks’ ability to enter into non-deliverable forwards (NDF) and announced that it has also set a system-wide limit for internal monitoring.  This is just the latest serving in the BSP’s menu of options for managing the pressures of an appreciating currency.

The BSP has been wrestling with capital inflows all year round, supplementing its use of policy rate cuts (total of 100bp this year) and reserve accumulation (GIR up $8.6B to $84B as of November) with more unconventional tools aimed at speculators.  In January, it applied a higher risk weight on NDFs, successfully slashing NDF volumes from a reported high of $16 billion in mid-2011 to only $4 billion, and in July, banned foreigners from its special deposit accounts (SDA) but with less apparent success.

As it is, market sentiment on the peso is for further appreciation on top of the over 7% gain last year, among the highest in the region. This will attract more inflows as yields in mature markets are expected to remain low, and positive Philippine credit ratings outlook fuels expectation for investment grade rating this year.  Likewise, forecast surpluses in the current account due to growing remittances, BPO service exports and electronic export recovery will continue to provide the peso fundamental support. 

This is creating serious concern, not only for OFW workers, exporters and BPO players, but also manufacturers threatened by cheaper imports. Socio-economic Planning Secretary Balisacan has also publicly shared his worries on a further appreciation's broader impact on the economy.

An investment revival, including in government’s PPP program, may boost dollar demand and ease appreciation pressure as spending in import-intensive mass transport, water, power and other infrastructure projects suck up some of the foreign exchange inflows.  While financing from foreign equity investors as well as our traditional development partners can be expected to bring in dollars, something that should be encouraged considering a more long-term strategic perspective, a major part of the infrastructure investments will be done via local borrowing under the current favorable borrowing environment abundant liquidity and lengthening maturities.   

Pending such pick up in domestically financed capital imports, the Department of Finance can be more aggressive in cutting down its foreign borrowings from capital markets in favor of local financing and source payments for maturing dollar debts from the country’s international reserves.

Should portfolio flows continue unabated, the BSP has other measures it can consider, or likely already considering, which it can implement in a calibrated manner to respond to actual developments.

The record high level of reserves which earn very low interest rates vs. the SDA rate means the pressure on the BSP’s balance sheet has grown, and indeed, snowballs over time.  Just for the first three quarters of last year, it incurred a whooping P 68 billion in losses.  It may try to reduce the cost of that negative carry by lowering the policy/SDA rate, and rely more on less market based measures to mop up the liquidity that its dollar purchases generate. 

Such non-market based measures can include raising the reserve requirement on deposits or impose reserves on heretofore reserve-free holdings of banks, such as trust accounts under management. This would spread the cost to the banks which in turn will be passed on to savers. Care will need to be taken that this does not contribute to disintermediation, i.e. discourage savings in banks.

As allowed under its charter, the BSP may also try to earn a higher yield from the reserves by investing these in higher yielding securities, given the paltry returns it gets in the most prime ones it currently invests in for maximum safety. The current yield on five year US Treasury notes for example is under 1 percent, compared to the 3.75 percent that the BSP pays for SDA’s.  

There have also been proposals in Congress to set up a sovereign wealth fund to carve out a portion of the “excess reserves” to invest in development projects, including for state lending to small and medium scale industries. Unless carefully structured, and under an ideal administration, this may give rise to a host of governance/moral hazard concerns. Besides, we already have the SSS and the GSIS that are allowed under their charters to invest overseas. Urging these institutions to place a small fraction, say ten percent, of their investible funds to overseas investments will help the BSP in sucking up dollar flows, even as they align with global pension fund management best practice by diversifying their portfolio holdings.

If push comes to shove, the government can take stronger measures to control capital flows by way of a tax on short term placements, the so-called Tobin tax, as has been pioneered by Chile in the 90's, and which has been more recently used in Brazil on and off to manage foreign currency inflows and their impact on the exchange rate. However, I do not think our BSP is anywhere close to supporting such at this time. 

Part of this column came from GlobalSource Market Brief, Stemming the Tide, 28^th December 2012, written by Christine Tang and the columnist.  Romeo Bernardo is a Board Director of IDEA. He served as Undersecretary of Finance during the Aquino 1 and Ramos administrations. 

The 'strong' peso problem

Business World
Introspective

IN ITS latest attempt to deal with speculative inflows, the Bangko Sentral ng Pilipinas (BSP) capped in the last days of last year, individual banks' ability to enter into non-deliverable forwards (NDF) and announced that it has also set a system-wide limit for internal monitoring. This is just the latest serving in the BSP's menu of options for managing the pressures of an appreciating currency.

The BSP has been wrestling with capital inflows all year round, supplementing its use of policy rate cuts (total of 100bp this year) and reserve accumulation (GIR up $8.6 billion to $84 billion as of November) with more unconventional tools aimed at speculators. In January, it applied a higher risk weight on NDFs, successfully slashing NDF volumes from a reported high of $16 billion in mid-2011 to only $4 billion, and in July, banned foreigners from its special deposit accounts (SDA) but with less apparent success.

As it is, market sentiment on the peso is for further appreciation on top of the over 7% gain last year, among the highest in the region. This will attract more inflows as yields in mature markets are expected to remain low, and positive Philippine credit ratings outlook fuels expectation for investment grade rating this year. Likewise, forecast surpluses in the current account due to growing remittances, BPO service exports and electronic export recovery will continue to provide the peso fundamental support.

This is creating serious concern, not only for OFWs, exporters and BPO players, but also manufacturers threatened by cheaper imports. Socioeconomic Planning Secretary Balisacan has also publicly shared his worries on a further appreciation's broader impact on the economy.

An investment revival, including in government's PPP program, may boost dollar demand and ease appreciation pressure as spending in import- intensive mass transport, water, power and other infrastructure projects suck up some of the foreign exchange inflows. While financing from foreign equity investors as well as our traditional development partners can be expected to bring in dollars, something that should be encouraged considering a more long-term strategic perspective, a major part of the infrastructure investments will be done via local borrowing under the current favorable borrowing environment abundant liquidity and lengthening maturities.

Pending such pickup in domestically financed capital imports, the Department of Finance can be more aggressive in cutting down its foreign borrowings from capital markets in favor of local financing and source payments for maturing dollar debts from the country's international reserves.

Should portfolio flows continue unabated, the BSP has other measures it can consider, or likely already considering, which it can implement in a calibrated manner to respond to actual developments.
The record high level of reserves which earn very low interest rates vs. the SDA rate means the pressure on the BSP's balance sheet has grown, and indeed, snowballs over time. Just for the first three quarters of last year, it incurred a whooping P68 billion in losses. It may try to reduce the cost of that negative carry by lowering the policy/SDA rate, and rely more on less-market based measures to mop up the liquidity that its dollar purchases generate.

Such non-market based measures can include raising the reserve requirement on deposits or impose reserves on heretofore reserve-free holdings of banks, such as trust accounts under management. This would spread the cost to the banks which in turn will be passed on to savers. Care will need to be taken that this does not contribute to disintermediation, i.e. discourage savings in banks.

As allowed under its charter, the BSP may also try to earn a higher yield from the reserves by investing these in higher yielding securities, given the paltry returns it gets in the most prime ones it currently invests in for maximum safety. The current yield on five-year US Treasury notes for example is under 1%, compared to the 3.75% that the BSP pays for SDA's.

There have also been proposals in Congress to set up a sovereign wealth fund to carve out a portion of the excess reserves to invest in development projects, including for state lending to small and medium scale industries. Unless carefully structured, and under an ideal administration, this may give rise to a host of governance/moral hazard concerns. Besides, we already have the SSS and the GSIS that are allowed under their charters to invest overseas. Urging these institutions to place a small fraction, say ten percent, of their investible funds to overseas investments will help the BSP in sucking up dollar flows, even as they align with global pension fund management best practice by diversifying their portfolio holdings.

If push comes to shove, the government can take stronger measures to control capital flows by way of a tax on short term placements, the so- called Tobin tax, as has been pioneered by Chile in the '90s, and which has been more recently used in Brazil on and off to manage foreign currency inflows and their impact on the exchange rate. However, I do not think our BSP is anywhere close to supporting such at this time.

Romeo Bernardo is a board director of IDEA. He served as Undersecretary of Finance during the Aquino 1 and Ramos administrations. Part of this column came from GlobalSource Market Brief, Stemming the Tide, Dec. 28, 2012, written by Christine Tang and the columnist.

Beyond chugging along

Business World
Introspective

A COMMON question raised at the height of the 2008/09 financial crisis was Why was the Philippines spared by the savage global financial storm in the high seas? The answer: The Philippine ship never left port. I may have actually first heard that during the 1997 Asian Financial crisis. I do not hear that half joke repeated too much these days; indeed, things are looking up.

The Philippines is better situated today than for as long as many of us can remember. Objective financial indicators show this - robust gross international reserves, manageable and declining public debt ratios, being a net external creditor to the world, healthy banking statistics. Our global competitive ranking has zoomed by a remarkable 10 places for the second year in a row. The ADB upgraded forecasts of Philippine growth, already among the highest in the region, even while downgrading everyone else (more recently, the World Bank and IMF did; as have we at GlobalSource, months earlier). A respected professor and monetary official has been quoted as saying we are practically invulnerable to external shocks.

Indeed, our consumption-based economy, driven by sturdy OFW remittances, a very competitive BPO sector and our growth-favored demographics, is expected to stay resilient even in the face of elevated risk warnings from the IMF (risks of a serious global slowdown are alarmingly high). This resiliency has been tested during the subprime triggered global recession of 2008/2009 where we continued to chug along during the worse of it.

We will likely continue to do so, short of severe fat tail risks materializing. Among such, a default of one of the periphery Eurozone countries and its contagion effects globally on confidence, financial market stability, growth, in a downward spiral, is probably what worries most. (There are others - Israel surgically attacking Iran's nuclear sites leading to oil supply disruptions, a flare-up in the contested Asian seas/shoals, etc.)

While we need to be conscious of possible disruptions such external shocks can inflict on our economy, what I worry about most is homegrown. That is, of us failing to fully seize as a nation, the opportunities that our comfortable fiscal and external finances, new windows for attracting investments, and most importantly - credible leadership - have opened for us to scale a higher growth path.

The President and his team are mindful of this. The Philippine Development Plan targets 7%-8% growth. Secretary Purisima has recently expressed the same target in a recent upbeat article about the country in the Financial Times. This is a growth rate twice as fast as in the last decade.

The challenge for the Philippines is to attract enough investment and job creation above the comfort zone of 3%-4% growth created by the remittances of our citizens who toil abroad to support their families at home and the growing BPO sector which can only employ a tiny fraction of our people.

An excellent document issued by the private-sector Arangkada Philippines: A Business Perspective (http://www.arangkadaphilippines.com) identifies the reform measures that are needed to achieve this kind of growth acceleration. From a presentation of its principal author, John Forbes of the Joint Foreign Chambers earlier this year, I believe the administration scores a good based on progress achieved in the 472 reform measures identified (details available in the Web site).

Where can such growth come from?

The administration has just adopted a mining policy that will discourage new projects for the next few years, so let's not count on mining for new jobs or tax revenue in the near term. But agribusiness remains promising if we can improve infrastructure and create a post-CARP environment that encourages corporate farming, alongside cooperatives and small farmers. The focus of the administration is on rice self sufficiency, whereby bulk of the DA (including a still unreformed NFA) budget is devoted to a low-value crop instead of infrastructure and services that would help farmers achieve income self sufficiency by creating opportunities in other areas in the rural sector. It's puzzling for every economist I have spoken with.

There is also immense opportunity in manufacturing brought about by major relocations from Japan and China due to such factors as higher energy costs and yen appreciation in Japan and anti-foreign (especially anti- Japanese) sentiments, rising labor cost, and the appreciating renminbi in China. Thailand faces shortages of young workers and threat of future flooding while Vietnam is struggling with macro-imbalances. Flexibility in labor policies to make the Philippines more competitive is critical.

The idea of Labor Employment Zones, propounded by Dr. Gerry Sicat would be a good way to attract large labor using enterprises in manufacturing and agricultural processing to establish here. Their main feature is that the zones will be exempt from the application of the minimum wage regulation and from other regulations against fixed-term contracts and on the regularization of workers.

Poor infrastructure, both hard and soft (education, health) is frequently cited as deterring investments. PPP can play a role in attracting private investment in some infra areas that are financially attractive, or can be made so through viability gap funding. However, government will need to have a coherent long-term infrastructure plan (the Public Investment Program is still not out) and be more deliberate and clear in identifying the areas where private sector involvement is sought, and move with judicious speed in developing bankable projects for bidding out such.

Durable public finances is a key element for providing the public funding components of PPP, as well as for fully government-funded projects. The latter are still expected to account for the much larger part of infra investments by far.

In this connection, passage of the sin tax reform bill, now in the middle of hot debate in the Senate, and in the public arena, is seen by many, notably credit rating agencies, as a test of the administration's resolve to achieve its economic and governance legacy. For over two decades, dominant tobacco and alcohol producers have been successful in blocking reform, such that the present system continues to yield low and declining revenues from sin taxes due to non-price indexation and a discounted tax rate.

Based on a case study Christine Tang and I did for a forthcoming ADB book, Political Economy of the Reformed Value-Added Tax in the Philippines (Chapter 2), I think it will take nothing less than the President's strong intervention with legislators to get this through in any form resembling what the DoF submitted to Congress. Such was successfully done by his predecessor in the case of the reformed VAT law, and in a likewise defining issue for his administration, by him, in the Corona impeachment trial.

Romeo L. Bernardo is Philippine advisor of GlobalSource and a board member of the Institute for Development and Econometric Analysis, Inc. He was Undersecretary of Finance during the Aquino 1 and Ramos administrations.

Growth forecast hiked anew

Business World
by: Kathleen A. Martin


CONSULTANCY GlobalSource Partners has hiked its 2012 Philippine growth forecast anew, citing robust domestic demand and continued government spending.

Economists Romeo L. Bernardo and Margarita D. Gonzales, in a Sept. 11, report upgraded their full-year gross domestic product (GDP) growth to 5.8% from 5.5%, near the high end of government's 5-6% target.

This is the third time the US-based consultancy has revised its 2012 outlook: from 4.5% last December, the forecast was changed to 5% in June then to 5.5% last Aug. 31.

The first recast followed better than expected GDP growth of 6.3% in the first quarter and the second came after the second quarter's 5.9% result.

Robust domestic demand should be able to bring full-year growth to between 5.5% and 6% this year, Mr. Bernardo and Ms. Gonzales said.

They noted this would be supported by remittances from Filipinos working abroad, although a peso strengthening may weaken the spending power of families receiving the money.

Aside from consumer demand boosting the economy, the economists said government spending would further drive GDP growth.

The recovery in public spending this year, especially on construction, has certainly helped boost domestic demand... With outlays still way below program government has some fiscal room to maneuver in the event of a downturn, Mr. Bernardo and Ms. Gonzales said, projecting a 2.5% deficit to GDP ratio.

The economists tagged a decline in exports a threat to growth as global uncertainties remained.

Another export slowdown remains a sharp risk, as muddling-through continues in advanced economies including the US, though we should see policy responses coming from China, they said.

There is also the possibility of a sustained uptrend in oil prices as Middle East tensions persist, Mr. Bernardo and Ms. Gonzales added.

The best case scenario, they said, would be a global turnaround leading to a pickup in exports and remittances.

This could also help unlock the billions of dollars in FDIs (foreign direct investments) reportedly pledged by foreign firms through the country's export-oriented special economic zones, they said.

In the worst case, there is sharp deterioration in the euro zone with a possible default of its weaker members, though we believe the fallout can be contained with coordinated global policy action.

Both economists, meanwhile, expect GDP growth to slow to 5.5% next year, again due to global uncertainties.

Still, 2013 being an election year, we may see upside surprises depending on how well the ruling party can mobilize domestic spending, Mr. Bernardo and Ms. Gonzales said.

Consultancy firm revises Philippine growth forecasts

Business World
Top Stories

US-based consultancy firm GlobalSource Partners has upgraded its full- year gross domestic product (GDP) growth forecast for the Philippines following the release this week of encouraging second quarter data.

Analysts Romeo L. Bernardo and Margarita D. Gonzales, banking on strong consumer demand in the first semester, hiked their 2012 GDP outlook to 5.5% from 5%,

All in all, despite slowing momentum, domestic demand seems strong enough in H1 to bring full-year growth to above 5% this year -- likely closer to 5.5% in our estimate, Mr. Bernardo and Ms. Gonzales said in an Aug. 30 market brief.

It was the second revision for the year for GlobalSource, which in June upgraded its original 2012 outlook of 4.5% to 5%, also citing strong domestic demand.

The forecast remains within the official 5-6% target for the year. It compares to lower expectations by the International Monetary Fund (4.8%) and the World Bank (4.6%).

The government on Thursday announced that the economy grew by 5.9% in the April-June period, down from the first quarter's revised 6.3%. It was just above the median forecast in a BusinessWorld poll of analysts.

For the rest of the year, Mr. Bernardo and Ms. Gonzales said the economy should find support from the services exports, as the sector registered the highest growth at 7.6% in the three months to June.

The country's BPO firms seem to be resilient so far to global crises, they noted.

Mr. Bernardo and Ms. Gonzales , however, downgraded their 2013 growth forecast due to lingering uncertainties in the global economy.

Given the still negative outlook on global growth next year, we lower our forecast for 2013 from 5.5% to 5%, which is still an optimistic forecast that partly depends on elections and related public spending helping to drive growth, the analysts said.

The government has a 6-7% GDP growth target for next year.

Last year, the Philippines grew by a lackluster 3.9%, from a record 7.6% in 2010, due partly to government underspending.