ING forecasts 5.4% PH growth this year

Dutch bank ING is projecting a moderate 5.4 percent growth for the Philippines this year, saying the impact of the central bank’s rate hikes could have propelled robust growth but it is handicapped by “soft” capital formation.  

The 5.4 percent growth estimate is considerably lower than the government target of 6.5 percent to 7.5 percent this year. It is also lower than 2023’s full-year 5.6 percent growth, which was also below the government’s goal of six percent to seven percent. 

ING senior economist Nicholas Mapa, in an ING Manila’s economic briefing on Monday, Feb. 19, said domestic growth seems strong this year but “below par as handicaps persist.” 

He said one of these handicaps is the lack in capital formation as an impact of the Bangko Sentral ng Pilipinas’ (BSP) cumulative rate hikes since May 2022, for a combined 450 basis points to bring the target reverse repurchase rate or the policy rate to 6.5 percent. 

Because of this, Mapa said the “missing link” for a within-target growth is private investment and a National Government spending spree not hampered by a “soft” capital formation. 

Capital formation is an integral part of GDP growth. However, capital formation and growth prospects were soft in 2023 due to rate hikes and it could persist this year. 

For 2024, ING also forecasts inflation of three percent versus an actual six percent in 2023. The forecast is within the BSP’s target of two percent to four percent. It is also lower compared to the risk-adjusted forecast of the BSP of 3.9 percent for 2024. 

Mapa also predict the exchange rate will end with a stronger peso this year at P54.90 since he also expects the BSP’s Monetary Board will cut the policy rate by 50 basis points (bps) from 6.5 percent to six percent, thereby boosting the peso performance. 

Based on his presentation during the briefing, Mapa expects the first quarter GDP will perform better at six percent compared to the fourth quarter 2023 GDP of 5.6 percent. By the second quarter, he thinks the economy will grow by 6.3 percent but then will drop to 4.7 percent by the third quarter and further down to 4.5 percent in fourth quarter this year. 

He said the rate hikes impact bank lending as well as GDP growth, and that the “elevated rates (has kept) capital formation subdued after years of underinvestment.” 

As to inflation, Mapa reiterated near term headwinds of El Niño, as well as high interest rates while government debt has remained significantly on the hefty side. 

In the first quarter this year, he expects inflation will average at 2.9 percent which is within the government target range. It will likely remain below four percent in the second quarter at 3.3 percent; 3.1 percent in the third quarter; and 3.4 percent in last quarter of the year. 

Inflation rate is “low in 1Q, could spike again but base case is within target” by the close of 2024. 

With inflation going down, Mapa said BSP Governor Eli M. Remolona Jr. will stay hawkish but he also noted that BSP needs to cut its high policy rate this year. 

His estimate is that BSP will keep the current 6.5 percent benchmark rate until the second quarter, and then reduce it by 25 bps by the third quarter to 6.25 percent. He sees another 25 bps cut by the fourth quarter to end the year at a flat six percent. 

ING said keeping inflation rates low is a top priority of the BSP. “Regarding the timing of monetary policy adjustments, those made by the BSP will likely be based on any pivots made by the US Federal Reserve,” said Mapa. 

With rate cuts, the peso is expected to appreciate to the P54 level by the fourth quarter 2024. It is currently ranging between P55 and P56 vis-a-vis the US dollar. 

Originally published in Manila Bulletin: Opens in a new tabhttps://mb.com.ph/2024/2/19/article-1900