MAKATI CITY – Fitch Solutions Country Risk and Industry Research upped its 2022 economic growth forecast for the Philippines following the better-than-expected output in the first half despite challenges, such as elevated inflation rate.
In a report released last week, Fitch Solutions now sees a 6.6-percent growth for the domestic economy this year, within the government’s 6.5 to 7.5 percent target band. Its previous forecast was 6.1 percent.
However, it projects slower growth in the second half of the year given the expected slowdown of the global economy, tightening global monetary conditions, and high energy prices.
The country’s gross domestic product (GDP) slowed to 7.4 percent in the second quarter from the previous three months’ 8.2 percent, bringing the first half average to 7.8 percent.
On a quarter-on-quarter seasonally adjusted basis, domestic output in the second quarter stood at -0.1 percent compared to the 1.9 percent from January to March this year.
The report said the growth deceleration is in line with Fitch Solutions’ projection “but the magnitude was lesser than we expected.”
“Our forecast reflects our expectations that H222 (second half 2022) growth will moderate relative to the 7.8 percent y-o-y (year-on-year) growth print in H122,” it said.
The report said growth in the first half of the year benefited from the continued reopening of the economy, spending related to the May national polls, as well as the accommodative monetary policy, which buoyed consumption and investment.
“These tailwinds helped offset external headwinds stemming from elevated energy prices, a slowdown in the world economy, and tightening global monetary conditions. However, we believe that these tailwinds will continue to fade over the coming months, while growth headwinds intensify, leading to slower growth in H222,” it added.
Fitch Solutions expects the country’s exports to post slower expansion this year at about 6 percent compared to the 7.8 percent last year, and the 7.4 percent in the first half of the year on expectations for a global growth slowdown.
The report said exports grew by 1 percent last July from 6.4 percent in the previous month, which was attributed to drop in sales for electrical.
It said electronic equipment historically accounts for around 51 percent of the country’s total exports.
The report said elevated energy prices will continue to weigh on domestic savings and on investment given that the country is a net importer of energy.
“Elevated energy prices have led to (a) drastic increase in the Philippines’ import bill, and, in turn, widening the trade deficit,” it said.
Also, households’ purchasing power is seen to be eroded by the accelerating inflation rate, which posted a further uptick last July to 6.4 percent from the previous month’s 6.1 percent.
The average inflation to date stood at 4.7 percent, higher than the government’s 2-4 percent target range.
Monthly rate of price increases surpassed the government’s target band since last April when it rose to 4.9 percent.
“Against the backdrop of the ongoing Russia-Ukraine war and adverse weather conditions in a number of food-producing countries in the region, energy and food prices will continue to be a significant source of upward pressure in the Philippines,” it said.
With inflation expected to remain elevated, the Bangko Sentral ng Pilipinas (BSP) and other central banks are seen to further tighten key rates, which would impact on investment and private consumption.
BSP’s policy-making Monetary Board (MB) has increased the central bank’s key policy rates by 125 basis points so far this year.
Fitch Solutions forecasts additional 100 basis points to bring the overnight reverse repurchase (RRP) facility rate to 4.25 percent by end-2022.
Amid these challenges, Fitch Solutions said risks to the economy’s expansion this year are on the downside due in part to rising cases of coronavirus disease 2019, which may prompt the government to implement movement restrictions, which then will likely impact on domestic growth.
It said any escalation of the Russia-Ukraine conflict “may cause further upside volatility to energy prices, further weighing on investment appetite and the Philippines’ trade position.”