The Philippines will outperform other countries in Southeast Asia as the country banks on its strong consumer base, a top lender said yesterday.
The Bank of the Philippine Islands (BPI) in its economic review and forecast briefing yesterday, said the economy is expected to grow by 6.1 percent this year and by 6.3 percent next year and said the economy “has been resilient despite significant headwinds like severe El Niño and devastating typhoons.
The economy managed to grow by 6 percent in the first half of 2024.
“This makes the country the second-fastest growing economy in the region next to Vietnam, with consumer spending and government construction as growth engines. Steady remittance inflows and falling unemployment have sustained the growth of household consumption,” said Raf Manalili, economist at BPI.
“Looking ahead, the Philippine economy will likely continue to outperform in the region, supported by its strong consumer base. Inflation is expected to be more manageable in the coming year given the improving prospects of food supply. With El Niño now behind us and the potential increase in production, along with tariff reductions, rice may become more affordable. Global commodity prices may also remain stable amid the economic slowdown in China,” Manalili added.
Inflation is seen to average 3.2 percent this year, slowing down further to 2.8 percent next year.
Last year, inflation averaged 6 percent.
BPI, however, noted upside risks to inflation remain, particularly the threat of La Niña and the African swine fever, among others.
The Ayala-controlled bank said lower inflation may boost consumption in the coming year, giving households more room for discretionary spending, while election-related expenditure could further stimulate economic activity.
“However, the recovery in household consumption may not be enough for the economy to reach the government’s growth target of 6.5 percent to 7.5 percent in 2025,” said Emilio Neri Jr., BPI lead economist.
Growth has to come from other structural drivers and sectors as well, Neri added.
He said area where the economy is currently struggling is private sector construction, particularly the corporate construction segment which has not returned to its pre-pandemic level.
“Elevated vacancy rates in office buildings, along with subdued demand for residential projects due to COVID, have slowed the recovery. Real estate companies have been less aggressive in constructing new projects,” he said.
“Monetary easing by the BSP (Bangko Sentral ng Pilipinas) through both the reserve requirement ratio (RRR) and RRP cuts could provide a lift to private sector construction and other sectors of the economy including tourism, cold storage, logistics, data centers and development of more industrial estates,” Neri added.
BPI sees the BSP’s policy rate to settle at 5.75 percent this year before it is further reduced by another 75 basis points to 5 percent next year.
The bank, however, raised concern rising protectionism, higher tariffs, geopolitical tensions in the Middle East and a resilient US economy could limit the ability of the BSP to cut rates.
“The recent volatility in the exchange rate and bond yields shows how sentiment in the markets can shift quickly. Moreover, inflation expectations can change just as quickly given the current global environment and the domestic supply shocks that can easily materialize,” it said.
“In this context, aggressive rate cuts may not be prudent. A cautious approach to policy rate cuts might be needed in order to offset these risks and ensure stability in the markets,” BPI added.
BPI said a gradual reduction in the policy rate aligns with the BSP’s long-term goal of cutting the reserve requirement ratio to 0.0 percent, allowing banks to allocate their resources more efficiently towards more lending.
“Lower RRR also helps local banks compete better with foreign financial institutions as the latter are not subject to such archaic banking rules. Cutting the policy rate gradually gives the BSP the flexibility it needs to reach its RRR target in a shorter timeframe. Gradual reduction also gives the BSP the time to rebuild its GIR, which today is not even 85 percent of the country’s total external debt,” it said.
Meanwhile, BPI sees the peso-dollar exchange rate to end the year at 55.30 and then rise to 54.20 next year.
The bank said the country’s current account deficit could remain manageable but sensitive to the actions of the US Federal Reserve next year.
“Based on historical experience, it seems the Peso has the tendency to strengthen when the Fed eases its monetary policy, as excess dollar liquidity brought by the rate cuts usually flows to emerging markets like the Philippines. However, while a Fed cut might lead to peso appreciation, its gains are likely to be smaller compared to other emerging market currencies given the current account deficit of the country,” it said.
