Following a stronger-than-expected expansion in H112, we expect the Philippine economy to grow by 5.0% in 2012 (up from our previous forecast of 4.2%). However, with pervasive external weaknesses set to undermine the country's robust trade outlook, we see GDP growth of 4.4% in 2013 (up from our previous forecast of 4.0%). At the same time, we also envisage a strong comeback in fixed capital growth in 2013, and believe that this will mark the beginning of a longer-term resurgence in investment.
Despite the fact that inflation has ticked up recently, we retain our end 2012 and 2013 inflation forecasts of 3.4% and 4.0%, respectively, and do not expect the Bangko Sentral ng Pilipinas (BSP) to raise its benchmark interest rate before the end of 2013. While we are currently forecasting for the central bank's benchmark interest rate to end 2012 at 3.75%, we acknowledge growing downside risks and note that BSP may make one more 25 basis point cut before the end of the year.
Despite the fact that the Philippines is likely to pass an expansionary budget for 2012, we expect the budget deficit to widen to just 2.2% of GDP in 2012 (before falling to 2.0% of GDP in 2013), compared with the government's projection of 2.6%, as spending continues to be limited by administrative difficulties. Nevertheless, we note that the Philippines' low GDP per capita and relatively high debt-to-GDP ratio will most likely prevent it from acceding to investment grade until at least late 2013.
Major Forecast Changes
We have upgraded our 2012 and 2013 GDP growth forecasts to 5.0% and 4.4%, from a previous forecast of 4.2% and 4.0%.
We have downgraded our end-2012 BSP benchmark interest rate forecast from 4.00% to 3.75%.
We have upgraded our end-2012 forecast for the Philippine peso to PHP44.00/US$, and note that risks to this forecast remain to the upside given the large scale of the US Federal Reserve's QE3 initiative and continued strong hot money inflows into the Philippines.
We have downgraded our forecast for the Philippines' current account surplus to US$7.3bn (3.0% of GDP) from US$8.9bn in 2012 and to US$7.7bn (3.0% of GDP) from US$11.1bn in 2013, as a result of a challenging external demand outlook and growing income outflows.
Key Risks To Outlook
Risks to our 2012 growth forecast are to the upside in the event that exports continue to outperform despite continued weakness in external demand. At the same time, we note that risks to our interest rate forecast are to the downside given the BSP' increasingly dovish outlook.
Click for Report details:Philippines Business Forecast Report Q1 2013