Local factors seen to drive growth

February 14, 2019

Local factors will contribute substantially to the Philippines' growth story this year and the expected growth slowdown in the first half of the year may prompt monetary officials to start cutting rates.

In his presentation during the 2019 ING Financial Markets Annual Research roadshow in Makati Tuesday, ING Bank Manila senior economist Nicholas Mapa said he expects the economy to post a 5.8 percent growth in the first quarter this year, slower than the 6.1 percent in the last quarter of 2018.

Growth in the succeeding quarters are projected to improve to 6.1 percent, 6.3 percent and 6.4 percent, to bring the full-year output to 6.2 percent, same as last year.

In a briefing after the event, Mapa told journalists that since domestic output is projected to slow in the first half this year “that should be a signal for the BSP to ease back on that brake pedal after stepping on it last year.” He was referring to the total of 175 basis points increase in the Bangko Sentral ng Pilipinas’ (BSP) key policy rates in 2018 on account of elevated inflation rate.

He explained that although election spending is seen to help boost growth this year, as what normally happens during an election year, the contribution will come from capital formation and not domestic consumption. The economist also pointed out that capital formation “is indeed challenged or hampered by a rate hike by the BSP and the delay in the budget.”

The government is currently operating on a re-enacted budget due the delay in the approval of the proposed P3.757-trillion budget for this year due to questions on the budget of the Department of Public Works and Highways (DPWH).

Approval of this year’s national budget, which contains changes from the original proposal, was made by members of the Bicameral Conference Committee as late as last February 8.

“Of course, there's still the external factor that will come into play but I think this year is going to be a little more locally-driven,” Mapa said.

With growth expected to slow down, the economist predicts BSP will start cutting rates by 25 basis points in May and another 25 basis points in the latter part of the year. “May is still a couple of weeks so that should give them ample time to get more data,” he said.

Mapa is also penciling in a total of 200 basis points cut in banks’ reserve requirement ratio (RRR), specifically in the first and third quarters this year. This is in line with the plan of BSP Governor Nestor A. Espenilla Jr. to bring the RRR level to a single digit by the end of his term in 2023.

Last year, the BSP cut the RRR by 200 basis points to 18 percent as it shifts towards a market-based implementation of monetary policy, as well as part of its financial market reforms.

Relatively, Mapa said capital formation is projected to post some pullback this year, citing the deceleration of lending activities of universal and commercial banks (U/KBs). BSP data show that bank lending slowed to 15.6 percent last December from 16.8 percent in the previous month.

Mapa said bank lending growth is “still healthy” but “it is showing a stark deceleration trend.” He, thus, forecast capital formation to growth by a “single digit to close to 10 percent” this year.

In the last quarter of 2018, capital formation grew by 5.5 percent year on year.