Philippines Country Risk Report Q4 2018
We have revised our 2018 real GDP growth forecast for the Philippines to 6.5%, from 6.3% previously, following Q1's stellar economic growth performance. However, we maintain our view that growth is likely to remain on a slowing path over the coming quarters, given that monetary conditions are expected to tighten further, and the deterioration in the business environment will likely continue to weigh on private investment and confidence.
We expect the Bangko Sentral ng Pilipinas to hike interest rates by a further 25 basis points to safeguard macroeconomic stability, which will take the benchmark RRP rate to 3.75% by end-2018. Inflation remains on a firm uptrend due to higher excise taxes, rising global oil prices and sustained high credit growth, which continues to push up aggregate demand. Meanwhile, the US Federal Reserve's increasing hawkishness and the escalation of US-China trade tensions will likely weigh further on the Philippine Peso, which is already the worst performing currency in the region.
We have revised the Philippines's Long-Term Political Risk Index score down to 64.2 (from 64.8) to reflect a deterioration in the 'characteristics of polity'. The upcoming May 2019 mid-term elections could see the ruling PDP-Laban dominate the senate, given that the opposition Liberal Party has been considerably weakened. This poses further downside risks to checks and balances in the country.
The Philippines saw a wider budget deficit of 3.9% of GDP in Q118, versus 2.3% in Q117. In view of the government's strengthened ability to implement its expansionary fiscal agenda, we have revised our forecast for the budget deficit as a share of GDP to come in at 3.0% in 2018, from 2.4% previously. This is in line with the Budget 2018 target.
The Philippine peso is looking technically and fundamentally bearish in the near term, and we are revising our forecast for the unit to average PHP52.50/USD in 2018, from PHP51.90/USD previously. Over the longer term, we hold a neutral view on the Philippine peso as strong and stable remittances will likely support the currency, partially offsetting higher inflation and a wider trade deficit. This should see the currency outperform in total return terms.
Political infighting could cause policy gridlock, while President Rodrigo Duterte's unpredictable temperament could upset existing trade relations with major economic partners such as the US and the EU.
Although the Philippines was not singled out as one of the 16 countries on US President Donald Trump's trade imbalance investigation list, the US remains one of the Philippines's largest sources of foreign direct investment and key trade partners. If Trump moves ahead with imposing more protectionist measures, it would likely affect the economy and the Philippine peso negatively.
The business environment appears to be deteriorating as the Duterte administration focuses more on the war on drugs and domestic security threats.
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