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Nomura, Credit Suisse raise GDP forecasts after strong Q2 result

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by August 19, 2016 General
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By Melissa Luz T. Lopez, Reporter

Posted on August 20, 2016

TWO international investment banks have hiked their growth forecasts for the Philippines as they grew even more bullish that the economy can expand faster this year, following a 7% climb seen during the second quarter and backed by positive signals from the Duterte administration.

In separate research notes, Nomura Singapore Ltd. and Credit Suisse said they raised growth estimates for the Philippines amid expectations that robust domestic demand will be sustained during this semester even as election-related effects taper off, assured that the new government’s policies will bring in more investments to stimulate the local economy.

The Philippine Statistics Authority on Thursday reported second quarter growth at 7%, the quickest pace in three years. Investments led to a faster climb in gross domestic product (GDP) from April-June, having grown by 27.2%, coupled with a 7.3% rise in consumer spending which offset a 14.3% decline in external trade.

This brought the six-month average to 6.9%, near the high end of the government’s 6-7% growth target for 2016.

Credit Suisse economist Michael Wan said full-year growth will likely hit 6.5%, higher than their earlier 6.2% estimate as the faster-than-expected climb seen during the first half would prop up the 2016 print.

“We raise our already above consensus Philippines GDP forecast further to 6.5% from 6.2% (consensus: 6.1%). This is on the back of the stronger 1H (first-half) GDP we have seen,” Mr. Wan said in a research note issued on Friday. “We continue to see some slowdown in 2H16 (second half 2016), reflecting fading out of election boost, with the moderation likely manageable.”

“We maintain our overall positive view on the economy driven by strength in private consumption, boosted by the increase in government salaries, a tighter labour market, and lagged impact of lower oil and rice prices.”

Credit Suisse added that increased government spending eyed by the Duterte administration, particularly for infrastructure, has the potential to unlock faster GDP growth, alongside a planned reduction in income taxes that would accord higher disposable incomes and beef up local consumption, a key growth driver.

However, Mr. Wan said they are keeping their 2017 growth forecast at 6%, slower than this year’s estimate as they assess the “timing and impact” of how the new fiscal plans will unfold.

CONTINUITY
For its part, Nomura Global Markets Research pegged GDP growth this year at 6.7% and 6.3% for 2017, citing “pro-growth” policies from President Rodrigo R. Duterte. These forecasts take off from earlier growth estimates of 6.3% and 6% for 2016 and 2017, respectively.

“This revision is supported by the solid H1 growth average of 6.9%, an impact from the ‘Brexit’ vote that was more contained than our initial expectations and, more importantly, by the Duterte administration’s commitment to policy continuity in implementing economic reforms and building infrastructure,” Nomura analysts Euben Paracuelles and Lavanya Venkateswaran said.

Nomura economists expect a 6.5% average growth during this semester.

On Thursday, J.P. Morgan & Chase Bank also raised its growth forecast to 6.4% from 5.3% previously, taking into account “resilient” domestic demand which allowed rapid growth at a time of highly volatile global markets. It added that improved business sentiment over the Philippine economy boosted private investments, which was a key driver of economic growth during the previous quarter.

All growth estimates show certainty of a faster uptick coming from 2015’s 5.9%.

The three banks also expect the Bangko Sentral ng Pilipinas to hold off any interest rate adjustments until next year, as current monetary policy has proven supportive of high economic growth. Instead, regulators will likely focus on implementing its auction of term deposits to have a better command on systemic liquidity and money market rates.

In its August issue of The Market Call, analysts from the First Metro Pacific Corp. and University of Asia & the Pacific (FMIC-UA&P) said they see sustained robust economic growth, which may log between 6.6-7.3% from July to December.

“We see continued robust growth of the economy as the private sector has reacted positively to the initial moves and policy pronouncements of the President,” the report read, with growth likely bolstered by increased activity in agriculture and construction against a manageable rise in commodity prices.

Plans to ramp up public spending also stand positive for the economy, although FMIC-UA&P said remaining bottlenecks in terms of project execution may hinder this goal.

“[A]bsorptive capacity constraints among the different government departments/agencies coupled with an eagle-eyed Commission on Audit, the fiscal deficit may only reach the original target of 2% of GDP inherited from the previous administration,” the report added, against the new budget shortfall cap pegged at P388.871 billion or 2.7% of GDP.

President Rodrigo R. Duterte’s economic managers are looking to widen the annual budget gap to as much as 3% of GDP from 2017 to 2022 to allow the government to spend more on infrastructure and social services, which is seen to allow an average growth of 7-8% while also trimming poverty rates to 17% from the current 26.3% after six years in office.

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