Nomura cuts Philippines GDP growth to 6.3%

MANILA, Philippines — Japan’s Nomura has slashed its 2022 gross domestic product growth forecast for the Philippines to 6.3 percent from the original target of 6.6 percent amid the expected further GDP slowdown in the second half.

Nomura’s latest growth forecast is now lower than the revised 6.5 to 7.5 percent target penned by the Cabinet-level Development Budget Coordination Committee (DBCC).

“Taking the disappointing second quarter outturn into account, we cut our 2022 GDP growth forecast further to 6.3 percent from 6.6 percent earlier, now below the government’s latest forecast range of 6.5 to 7.5 percent,” Nomura’s Euben Paracuelles and Rangga Cipta said.

The Philippines’ GDP expansion slowed to 7.4 percent in the second quarter from the revised 8.2 percent in the first quarter, bringing the GDP growth to 7.8 percent in the first half.

Paracuelles and Cipta said the Philippines’ GDP growth may further slow in the second half.

“Our forecast implies GDP growth in the second half slows significantly to 4.9 percent year-on-year from 7.8 percent in the first half, as low base effects fade,” the analysts said.

According to Nomura, inflation will continue to dampen consumption, a major driver of economic growth.

Inflation averaged 4.7 percent in the first seven months, exceeding the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP), after quickening to 6.4 percent in July from 6.1 percent in June.

“More fundamentally, we think elevated domestic inflation is still likely to dampen household spending further, as already evident in the second quarter data,” Nomura said.

According to Nomura, inflation would stay above six percent until October before easing gradually.

In addition, it said the recovery in the labor market is far from complete, with the unemployment rate still at six percent in June versus the pre-COVID level of around 4.6 percent.

For 2023, Nomura expects a sharp slowdown in GDP growth to 3.6 percent, reflecting its view of a recession in the Philippines’ major trading partners such as the United States and Europe.

Despite slower growth, Nomura said the BSP has no choice but to keep hiking rates due to persistently high inflation and external vulnerabilities.

For one, Paracuelles and Cipta said the Monetary Board is likely to deliver another 50-basis-point rate hike on Aug. 18, bringing the reverse repurchase rate to 3.75 percent from 3.25 percent.

The BSP has so far raised interest rates by 125 basis points this year on the back of the hawkish US Federal Reserve, the weaker peso, and soaring inflation due to the Russia-Ukraine war.

“We think the recent pickup in investor sentiment is likely to be temporary, as the Philippines remains vulnerable to high commodity prices and the Fed hiking cycle,” Paracuelles and Cipta said.

Nomura sees the BSP lifting rates by another 125 basis points to bring the overnight reverse repurchase rate to 4.50 percent by the end of the year.

“Our 2022 headline inflation forecast remains at 5.1 percent, which is well above BSP’s two to four percent target. We believe the BSP is likely to be the most aggressive central bank in the ASEAN region in the current hiking cycle,” Nomura said.