MANILA - HSBC has upgraded its growth forecast for the Philippines on the back of government spending, loose monetary policy and an improving global economy.
In a research note, the London-based bank said it raised its forecast to 5.9 percent form the initial estimate of 4.9 percent.
HSBC said the Philippines would grow faster than initially predicted, given signs of recovery in Japan and the US, and of accommodative monetary policy around the world.
For the first quarter of this year, HSBC sees Philippine gross domestic product (GDP) growing 6 percent, slower than the 6.8 percent in the fourth quarter of 2012. Growth would further slip to 5.7 percent and 5.4 percent in the second and third quarters, respectively, before picking up to 6.5 percent in the fourth quarter.
This would bring full-year growth to 5.9 percent, or a tad lower than the government's full-year target of 6-7 percent.
Trinh Nguyen, HSBC economist, said the bank expects Philippine exports to benefit from "Abenomics," referring to the economic policies of Japanese Prime Minister Shinzo Abe.
Nguyen said domestic demand would remain the main prop for Philippine GDP, adding that remittances would stay steady this year and expand by 6.3 percent given more job contracts in the Middle East and Asia.
The country's growth story is also supported by positive political and macro news, with the Aquino administration gaining public trust, as shown by surveys, due to its fiscal consolidation and anti-corruption thrust, Nguyen said.
Because of the "sensible" fiscal and monetary policies, the country will likely earn an investment grade status from the major credit rating agencies by the second half of this year, she said.
While the Philippines has enjoyed strong portfolio inflows, the same cannot be said of the job-generating foreign direct investments (FDI), HSBC said.
It said foreigners are still wary of putting their money into factories and other long-term bets, as shown by the lackluster performance in the area of FDI, flows of which were flat in the first 11 months of last year at $1.2 billion.
"FDI inflows are more indicative of investors’ perceptions of the government’s progress in resolving long-standing challenges. While attaining an investment rating upgrade will likely have a positive effect on FDI inflows as funding becomes cheaper for corporations, foreign investors will be watchful of reform momentum such as improving electricity production, transportation, and most importantly easing restrictions on foreign ownership," Nguyen said.
She said reform in foreign ownership, for one, would take long in coming, the earliest in 2016 when President Benigno Aquino III "can afford to use his political capital to change the Constitution."
Another bane of the country is the underperformance of the Aquino administration's public-private partnership (PPP) scheme, leaving government to shoulder most of the infrastructure spending, which in turn would hinge on tax collection improvements, HSBC said.
In this regard, the Aquino administration would have no choice but to increase tax rates of expand the tax base, starting with the mining sector reform, the bank said.
"At the moment, both seem politically unviable. As such, FDI inflows will continue to underperform in the coming years," Nguyen said.
While surveys indicate that the upcoming mid-term elections would lean towards the administration party winning, HSBC said the more crucial signal is succession after Aquino steps down in 2016.
"What’s more noteworthy to watch is the replacement of President Aquino in 2016, which would signal whether the reform momentum in the Philippines will be sustained. While a foundation is laid, reforms to long-standing challenges are still required. With the international community cheering it on, this is an opportunity that leaders of the Philippines should not squander," Nguyen said.
source: interaksyon.com
