GROWTH of the Philippine economy will likely slow to 6.3% next year from a 2022 rate of at least 7%, Singapore’s DBS Bank said, noting the impact of high inflation, interest rates, and fading pent-up demand.
In a report written by DBS economists Chua Han Teng, Radhika Rao, and Irvin Seah, the bank said the Philippines is on track to meet the government’s gross domestic product (GDP) targets of 6.5-7.5% this year and 6-7% in 2023.
“Economic opening from the pandemic has been a key support, despite multiple challenges from rising domestic inflation and interest rates, as well as global headwinds,” DBS Bank said.
The economy expanded by 7.6% in the third quarter on the strength of the economy’s reopening. This has brought year-to-date average growth to 7.7%.
“Even as we expect 2022 growth to register above 7%, we see the expansion cooling to 6.3% in 2023 given mounting headwinds,” DBS Bank said.
“In our view, domestic demand in 2023 is likely to be hit by still-elevated inflation, the lagged impact of aggressive monetary tightening in 2022, and the fading of pent-up demand and reopening gains,” it said, adding that private consumption may grow at a slower pace next year.
Headline inflation at the national level rose to 8% year on year in November from 7.7% in October. It was the eighth straight month that inflation exceeded the central bank’s 2-4% target.
DBS Bank expects inflation in the Philippines to average 4.4% in 2023 due to the impact of the central bank’s monetary tightening and easing commodity prices.
“Philippine households are already seen dipping into their savings and tapping loans given the high inflation environment, despite improving labor market conditions. Inflation has surged to multiple-year highs, undercutting real purchasing power and firms’ margins,” DBS Bank said.
The Bangko Sentral ng Pilipinas (BSP) has raised benchmark interest rates by 300 basis points (bps) so far this year, bringing the key policy rate to 5%, in a tightening cycle billed as an effort to contain inflation.
A BusinessWorld poll last week indicated that 14 out of 15 analysts expect the Monetary Board to continue hiking borrowing costs at its Dec. 15 meeting. Thirteen analysts expect the central bank to deliver a 50-bp rate increase, while one forecast a 25-bp hike.
“We think the tightening cycle will extend into early 2023 but is nearing its end, with the policy rate reaching 6%. It would enter an extended pause to anchor inflation expectations, while Fed pressures on the Philippine peso vs. the dollar also ease,” DBS Bank said.
As the peso weakened to a record low of P59 against the dollar in October, the BSP intervened to smooth out the currency’s volatility. The peso has since bounced back to the P55-to-the-dollar level, closing at P55.90 on Tuesday.
The Federal Reserve has raised policy rates by 375 bps since March, and is expected to continue tightening to cool inflation at its Dec. 13-14 meeting.
“After a sharp increase in the Philippines’ public debt to more than 60% of GDP in 2022 from 40% pre-pandemic to cushion the impact of the unprecedented health crisis, we expect the National Government to stay on a modest fiscal consolidation path,” DBS Bank said.
It also noted that the National Government is aiming to bring down its fiscal deficit gradually to 3% of GDP by 2028, with debt targeted to fall to less than 60% of GDP by 2025.
“Fiscal impulse in 2023 will be negative and widen from 2022. Government consumption is likely to provide little support to headline growth in 2023,” it added.
The government’s budget deficit stood at P1.11 trillion in the 10 months to October, equivalent to 67% of the P1.7-trillion deficit projected for the full year.
Outstanding debt hit a record P13.52 trillion at the end of September, bringing the debt-to-GDP ratio to a 17-year high of 63.7%. — Keisha B. Ta-asan
