Analysts divided over Q1 growth performance

MANILA, Philippines - Analysts carefully assessed the strong first quarter growth, with some welcoming it with upward revisions on their forecasts while others warned of risks that could stop the Philippines’ rise to economic power.

Romeo Bernardo and Marie-Christine Tang, economists at GlobalSourcePartners (GSP), raised their local growth projection to 6.5 percent this year from 6.1 percent, after expansion for the first three months hit 7.8 percent.

The first-quarter uptick, which beat market expectations and state targets, was the strongest for the past three years and the fastest in Asia, even surpassing China’s 7.7 percent growth during the same period.

“The upside surprise was due primarily to vigorous over-all investment activity which grew 48 percent and accounted for almost three-quarters of the first quarter growth,” they said in a report.

“The high investment growth reflected continuing robust construction, both private and public, higher spending on durable equipment and lower inventory drawdown,” they added.

Nomura economist Euben Paracuelles, in a separate report, said it now sees growth registering 7.3 percent from 6.4 percent originally. The 2014 forecast was also upgraded to 6.2 percent from 5.8 percent.

“Given the Aquino administration’s stronger mandate after the May mid-term elections, we expect reform momentum to pick up further through the rest of the year and beyond,” he said.

DBS economist Eugene Leow, in a separate report, likewise said there are “considerable upside risks” to his growth outlook of six percent, which marked a slowdown from last year’s revised 6.8 percent.

Low inflation of three percent, he said, could support consumption especially with moves by the Bangko Sentral ng Pilipinas (BSP) to allow more money to flow into the system by fine-tuning the special deposit account (SDA) facility.

Since the beginning of the year, rates in SDA – fixed-term deposits by banks and trust departments with the BSP – were slashed by 150 basis points to two percent to encourage more funds to flow out of the window.

A ban on singular investment accounts from parking in the facility will also take effect by January 2014.

“A rotation of funds out of these accounts into deposits would facilitate credit growth and translate positively into the real economy in the coming quarters,” Leow said.

Emilio Neri Jr. and Nicholas Antonio Mapa, analysts at the Bank of the Philippine Islands, said the country has achieved a “much higher growth trajectory” on the back of an accelerated state spending.

But for HSBC economist Trinh Nguyen, while the latest growth figures showed a “resilient economy,” the Philippines “is not a superman” and could remain exposed to external weakness.

In her report, Nguyen noted investments and government spending aside, other indicators such as consumption and trade – the “typical growth drivers” – slowed or contracted from the fourth quarter.

“This means that the central bank would likely cut SDA rate further when it meets on 13 June 2013… Benign inflationary pressures give it plenty of policy room to cut,” she pointed out.

Bernardo and Tang, for their part, warned of “overheating risks,” particularly in the real estate sector, as more liquidity flows out of the financial system.

This may “impact on growth prospects further down the road,” they said.