We maintain our forecast for the Philippine economy to grow by 6.3%for full-year 2017, despite GDP data in H117 averaging 6.4% y-o-y,as recent weakness in financial markets suggest the economy willface headwinds over the near-term. Over the longer-term, we arefairly optimistic on the economy, expecting growth to average 6.2%over the next five years on the back of higher savings and investment,as well as increased productivity resulting from continued businessenvironment reforms.
The BSP maintained its policy rate at 3.00% at a monetary policymeeting on September 21, and expressed a relatively neutral sentiment.
However, we believe that the cost of borrowing is currently toolow for the level of economic growth, and with interest rates risingin the US and inflationary pressures in the Philippines likely to pickup further in the coming months, our view is for the central bank tohike rates by 25bps in 2017 and again in 2018..
The Philippine government has proposed a PHP3.77trn budgetfor 2018, which marks a 12.4% increase from 2017. Although theprojected targets seem overly-ambitious, we believe that the government'sfocus on infrastructure and education spending will besupportive of growth over the short and long term.
With the ongoing battle against IS-affiliated Islamist militants inMarawi city, we believe that the peace process between the Philippinegovernment and the MILF is unlikely to see any progressin the coming months. Moreover, we note that the infiltration andproliferation of IS influence has complicated the security situation inthe Southern Philippines and this is reflected in its below-averageshort-term political risk score of 63.1 out of 100.
Major Forecast Changes
Following recent weakness in the PHP, we expect sideways tradingin the near-term as real interest rate differentials are unlikely to narrowfurther in favour of the US, with the BSP looking likely to hikeinterest rates in the coming months. Over the long term, we expectslight peso strength given the improvement in valuations, strongeconomic growth, and anchored inflation expectations.