Swiss bank UBS sees 7% growth for Phl

MANILA, Philippines - Swiss investment bank UBS became the latest institution to revise upwards its growth forecasts for the Philippines after a strong 7.8 percent economic growth in the first quarter.

In a report dated June 11, UBS economist Edward Teather said the investment bank has revised its Philippine growth outlooks for this year and the next to seven percent and six percent, respectively.

These projections are faster than the original targets of 6.3 percent and 5.5 percent during the same periods. They also compare to the Aquino administration’s six to seven-percent and 6.5 to 7.5-percent target ranges.

“Benign inflation, a current account surplus, a bullish government and a dovish central bank suggests Philippine policy settings are among the most likely in ASEAN-5 to provide insurance against downside risks to growth,” Teather said.

Consumption, investments, and a low interest environment should support economic growth going forward, as well as an expected recovery in exports, the investment bank said. “Extremely strong” government spending could also provide a boost, it added.

Teather noted that private consumption, which expanded 5.1 percent in the first quarter, was driven by high consumer confidence and strong peso. It could prove to be “relatively resilient” toward 2014, especially with inflation on a downtrend.

Inflation is seen to settle at 2.7 percent this year before picking up to 3.8 percent next year. These were slower projections versus 3.5 percent and four percent, respectively. As of May, consumer prices rose by an average three percent.

The Bangko Sentral ng Pilipinas (BSP) has a three to five-percent target range for this year and the next.

Investments will also remain firmly anchored on strong construction activity throughout the year, Teather said. For the first three months, investments grew 16.9 percent, while construction rose 32.5 percent.

“We expect high confidence levels and the easy credit environment to support investment growth, albeit not at the recent elevated pace,” he pointed out.

The BSP, which has kept key rates at record-lows of 3.5 percent and 5.5 percent since October last year, will likely keep policy on hold throughout the year. The BSP meets today to review policy for the fourth time in 2013.

On the fiscal front, accelerated government spending will be supported by a wide budget space, allowing the government to “provide infrastructure and services” and support domestic demand. The budget deficit is forecast to widen to 2.4 percent of economic output in 2013 and 2014 from two percent last year.

However, Teather also warned of the lone risk to the good outlook, which is the possible withdrawal of cheap money by the US Federal Reserve which has been pump priming the world superpower for five years now.

For one, the reversal in quantitative easing could weaken the peso versus the dollar by 2014. “The case for the peso’s strength against the dollar is diminishing,” the UBS analyst said.

Short-term interest rates may also rise, he said, while the country’s current account surplus— which indicates more than enough trade resources— could shrink or even shift to a deficit.

“We expect the Philippines to be less cyclically volatile than ASEAN peers like Malaysia and Thailand,” Teather said.