Following a blowout 6.6% performance in 2012, we forecast the
Philippine economy to expand by 5.5% in 2013. We 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.
Inflation ended 2012 at a benign 2.9%, but we retain our end-2013
inflation forecast of 4.0%. Price pressure is expected to rise gradually
as a result of strong economic activity and loan growth on the back
of easy monetary policy. At the same time, we do not expect the
Bangko Sentral ng Pilipinas (BSP) to raise its benchmark interest
rate before the end of 2013. We currently expect the central bank's
benchmark interest rate to end 2013 at its current 3.50%, but we
note that BSP will likely pursue further macroprudential measures in
an effort to discourage potentially destabilising levels of hot money
Despite the fact that the Philippines has passed another expansionary
budget for 2013, we expect the budget deficit to widen to come in
at a manageable 2.2% of GDP in 2013. While spending continues
to be limited by administrative difficulties, revenue growth will be
supported by the government's increasing tax collection efficacy
and the introduction of a wide-ranging sin tax.
As we expected, the Philippines has finally achieved an investment
grade rating from a major credit ratings agency, reflecting the country's
improved growth outlook and the government's increasingly
consolidated fiscal position. We expect that further upgrades from
the remaining agencies are likely in the cards.
Major Forecast Changes
In line with our view, fixed capital formation continued to surge in
Q412, expanding by 10.6% year-on-year (y-o-y) on the back of the
country's ongoing construction boom. Looking ahead, we expect
the Philippine economy to continue to outperform as a result of a
robust investment environment as well as the country's increasingly
healthy domestic consumer, and have upgraded our 2013 growth
forecast to 5.5% from 5.0% previously.
Key Risks To Outlook
Risks to our 2013 growth forecast are to the upside; exports could
continue to outperform despite continued weakness in external demand.
Risks to our peso outlook are likewise to the upside, as the
currency could continue to outperform in the event that hot money
outflows hold up for a longer-than-expected period.