S&P: Philippines may miss growth goal this year

MANILA, Philippines — S&P Global Ratings sees the Philippines again missing its growth targets this year as it kept its gross domestic product (GDP) growth forecast at 5.9 percent. While the projection is better compared to other economies in the region, it is again below the government’s 6.5 to 7.5 percent growth target.

“I think Philippine growth will be a tad under the government target this year at about 5.9 percent, then 6.2 percent next year. So that’s our baseline,” S&P senior economist Vincent Conti said in a webinar yesterday.

While this is one of the higher growth rates in the region, Conti said the GDP would still be slower than the country’s historical trend in previous years, especially outside of the pandemic.

The country’s GDP grew by only 5.6 percent in 2023, much slower than the 7.6 percent expansion in 2022. It also fell short of the government target of six to seven percent last year.

According to Conti, economic growth would be dragged down by slower consumption due to the impact of elevated inflation and weaker investments due to the Bangko Sentral ng Pilipinas (BSP)’s rate hikes.

“It will take some time even if inflation is already falling,” Conti said. “It will take some time for the consumers to recover from that impact on income and savings and also for confidence to come back.”

Inflation picked up to a two-month high of 3.4 percent in February from 2.8 percent in January, bringing the two-month average to 3.1 percent. Inflation is still within the two to four percent target of the BSP.

However, BSP Governor Eli Remolona Jr. said inflation may pick up in March as risks continue to cloud the outlook. Price pressures in March include rising prices of key food items and transport costs.

According to Conti, the debt watcher expects inflation in the Philippines to average 3.4 percent this year before easing to 3.2 percent in 2025.

“That gives the BSP some leeway to be able to consider starting to cut rates,” he said. “We’re expecting 75-basis-point cuts by the BSP cumulative by the end of this year and really starting only in the second half of the year.”

The Monetary Board has kept interest rates on hold after a 25-basis-point, off-cycle hike in October 2023. The central bank has tightened borrowing costs by 450 basis points between May 2022 and October 2023, bringing the key rate to a near 17-year high of 6.50 percent.

However, the BSP will likely not move before the US Federal Reserve does as inflation has only come back into the target recently, and to avoid depreciating pressures for the peso.

Meanwhile, S&P Global Ratings credit analyst Nikita Anand said the debt watcher continues to expect strong and robust growth for Philippine banks this year, amid the country’s robust growth.

“We believe improving macroeconomic conditions will offer good growth opportunities along with stable asset quality,” she said.

“Higher economic growth along with lower inflation and interest rates will support credit demand, in our opinion. We are forecasting credit growth to pick up to 10 to 12 percent this year after the somewhat subdued eight percent growth in 2023,” she said.

S&P director Yeefarn Phua also said the country’s robust growth momentum would likely support its BBB+ credit rating.

However, S&P may lower the ratings if economic recovery in the Philippines falters, which would lead to erosion in the long-term trend and weaken the government’s fiscal settings, he said.

If the country’s current account deficit would also continue to widen, it would lead to a structural weakening of the Philippines’ external balance sheet and add downward pressure on the ratings, he said.