THE PHILIPPINE ECONOMY is expected to fare better in the second half of the year, as easing interest rates could lift consumption and improving external climate may boost trade, according to Moody’s Analytics.
“The economy will fare better this year, especially in the second half. Fading inflation will give the Bangko Sentral ng Pilipinas (BSP) confidence to lower borrowing costs,” Moody’s Analytics said in its weekly report released on Monday.
Headline inflation is expected to cool down in the coming months due to favorable base effects. A BusinessWorld poll of 16 analysts last week yielded a median estimate of 3.1% for January inflation, which is within the 2.8-3.6% month-ahead forecast of the BSP.
If realized, this will be the second consecutive month that inflation will be within the BSP’s 2-4% target band. It will also be slower than the 3.9% print in December and 8.7% a year ago.
However, Moody’s noted that household spending will be under pressure in the first half.
“Volatile inflation prints in the first half of the year will persuade the BSP to stay on hold, leaving us to expect its first rate cut to be in June at the earliest,” it said.
To tame inflation, the Monetary Board hiked borrowing costs by a total of 450 basis points (bps) from May 2022 to October 2023, bringing the key rate to a 16-year high of 6.5%.
BSP Governor Eli M. Remolona, Jr. earlier said the central bank is still hawkish, and is prepared to tighten as necessary amid risks to inflation. He hinted that the BSP may consider cutting borrowing costs in the second semester.
“As borrowing costs ease, private consumption and investment should benefit. An improving external climate will bolster trade, and an expected upturn in demand for semiconductors and electronics will brighten prospects in the second half,” Moody’s Analytics said.
The Philippine economy grew by 5.6% in 2023, slower than the 7.6% expansion in 2022 and fell short of the government’s 6-7% target.
In the fourth quarter, gross domestic product (GDP) expanded by 5.6%, slower than the revised 6% GDP growth in the previous quarter and the 7.1% expansion a year ago.
“On the expenditure front, households and private investment did the heavy lifting in the final quarter. Easing inflation, a tight labor market, and a healthy inflow of remittances gave consumers confidence to spend,” Moody’s said.
Household final consumption jumped by 5.3% in the October-to-December period, faster than 5.1% in the previous quarter but slower than 7% a year earlier. This brought the full-year household spending to 5.6%, slower than 8.3% in 2022.
The top contributors to fourth-quarter consumption were restaurants and hotels (16.2%), transport (12.2%) and recreation (7.3%).
Meanwhile, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said Philippine GDP in 2023 heavily relied on household consumption.
“Consumption remained surprisingly robust with Filipinos indulging in a possible ‘one for the road’ round of revenge spending, powering 4.2 percentage points of the overall 5.6% GDP. Although this strong pace of expenditure came at the cost of higher consumer debt and lower savings,” he said in a note.
Moody’s Analytics also said government spending and trade were the economy’s weak spots in the fourth quarter.
Government spending contracted by 1.8% in the fourth quarter, a reversal of the 6.7% growth in the previous quarter and 3.3% a year ago. Year to date, state spending posted flat growth of 0.4%, significantly slower than the 4.9% in 2022.
“Meanwhile, a leap in investment, which was led by the construction and durable equipment industries, came as a surprise given high borrowing costs in the Philippines,” Moody’s said.
Gross capital formation — the investment component of the economy — jumped by 11.2% in the October-to-December period, faster than 3.3% a year ago. This brought the full-year gross capital formation to 5.4%, slower than 13.8% a year ago.
However, Mr. Mapa said private investment only contributed 0.7 percentage point to the overall GDP growth in 2023. This is the slowest pace of contribution since 2012, excluding the coronavirus pandemic.
“We can trace the slide in capital formation numbers to aggressive rate hikes in 2022, which undoubtedly resulted in slower bank lending growth to productive sectors and resulted in a slower pace of private construction activity and investment in durable equipment,” he said.
Given the underinvestment during the lockdowns, Mr. Mapa said the Philippines must see a substantial and sustained push for investments.
“Private investment ensures that the productive capacity of the economy is constantly pushed out further, ensuring improved efficiency and productivity for a more sustained pace of expansion, beyond simply relying on household spending to carry the load,” he said.
For 2024, he said the government has set another elevated growth target to help propel the Philippines to upper middle-income status as soon as possible.
This year, the government is targeting to achieve a 6.5-7.5% GDP growth.
“If the Philippines is serious about chasing faster growth and the quick ascension to higher income levels, we must recognize the role that private investment can play in helping the economy achieve just that” Mr. Mapa said.
He added that while private consumption will continue to be the main driver of growth this year, private investment could also drive growth in the short and medium term, as this could push higher productive capacity. — Keisha B. Ta-asan