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Philippines Country Risk Report Q4 2018

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.

Key Risks

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.


Executive Summary
Core Views
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic - SWOT Analysis
Political - SWOT Analysis
Economic Outlook
Economic Growth Outlook
Philippines's Growth Likely To Remain On Slowing Path
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: MAIN IMPORT AND EXPORT PARTNERS
TABLE: MAIN IMPORTS AND EXPORTS
Monetary Policy
Rate Hiking Cycle Not Yet Over For The Philippines
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
Philippines's Budget Deficit To Widen In 2018
Philippines Country Risk Q4 2018ContentsStructural Fiscal Position
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
Currency Forecast
Modest Weakness Ahead For The Philippine Peso
TABLE: CURRENCY FORECAST
10-Year Forecast
The Philippine Economy To 2027
Potential For Higher Investment Rate To Sustain Economic Growth
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
Philippine Political Institutions At Risk Of Decline
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Prospects For Improving Governance
Global Macro Outlook
Pressure On EMs Grows, As Do Divergences
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: PHILIPPINES – MACROECONOMIC DATA & FORECASTS

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