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Philippines Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Real GDP growth in the Philippines accelerated from 5.8% y-o-yin Q215 to 6.0% in Q315, as strong domestic demand more thanoffset export weakness. Domestic resilience should persist, informingour expectations for the Philippine economy to remain on a soundfooting despite growing external challenges. Accordingly, we areforecasting real GDP growth to come in at 5.7% and 6.0% in 2015and 2016, respectively.Following the decision by the Bangko Sentral ng Pilipinas (BSP) tokeep its benchmark interest rate unchanged at 4.00% at its Decembermonetary policy meeting, we are forecasting the central bankto stand pat over the course of 2016, as the Philippine economyshould remain in a growth-inflation sweet spot.

That said, potentialeconomic risks stemming from a worsening of the external environmentand upcoming elections, as well as inflation risks arising fromprolonged El Nino, could lead to monetary adjustments.The prospects for capital gains in the Philippine fixed income marketwill be limited in the months ahead owing to sustained nominal GDPgrowth without the need for interest rate cuts, the potential for inflationto rise due to prolonged El Nino, and the likely normalisationof US monetary policy. While yields will rise, we expect Philippinebonds to be less vulnerable than regional peers such as Indonesiato a Fed liftoff, owing to the country's improving fiscal and externalpositions.The Philippine peso is facing growing downside risks amid a precariousequity market, which has begun to underperform after yearsof outperformance and could signal headwinds facing the broadereconomy. That said, a solid current account surplus and high realinterest rates should provide some support. As such, we maintainour forecast for the Philippine peso to depreciate towards our end-2016 target of PHP48.26/USD.Major Forecast ChangesWe have revised our forecast for the BSP to keep its benchmarkinterest rate unchanged at 4.00% through 2016, versus a 25 basispoint hike previously.

Table Of Contents

Philippines Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Domestic Resilience To Sustain Strong GDP Growth8
Real GDP growth in the Philippines accelerated from 58% y-o-y in Q215 to 60% in Q315, as strong domestic demand more than
offset export weakness Domestic resilience should persist, informing our expectations for the Philippine economy to remain on a sound
footing despite growing external challenges Accordingly, we are forecasting real GDP growth to come in at 57% and 60% in 2015 and
2016, respectively
GDP By Expenditure Outlook 9
Economic Structure9
TABLE : ECONOMIC ACTIVITY9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS9
TABLE : FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Fiscal Policy 10
Yields To Rise Modestly On Sustained Growth, Fed Liftoff10
The prospects for capital gains in the Philippine fixed income market will be limited in the months ahead owing to sustained nominal
GDP growth without the need for interest rate cuts, the potential for inflation to rise due to prolonged El Nino and the likely normalisation
of US monetary policy While yields will rise, we expect Philippine bonds to be less vulnerable than regional peers such as Indonesia to
a Fed liftoff, owing to the country's improving fiscal and external positions
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES12
Monetary Policy 13
BSP To Stand Pat On Domestic Resilience, Muted inflation13
Following the decision by the Bangko Sentral ng Pilipinas to keep its benchmark interest rate unchanged at 400% at its December
monetary policy meeting, we are forecasting the central bank to stand pat over the course of 2016, as the Philippine economy should
remain in a growth-inflation sweet spot That said, potential economic risks stemming from a worsening of the external environment and
upcoming elections, as well as inflation risks arising from prolonged El Nino, could lead to monetary adjustments
Monetary Policy Framework 14
Currency Forecast 15
PHP: Peso Risks Rising Amid Equity Weakness15
The Philippine peso is facing growing downside risks amid a precarious equity market, which has begun to underperform after years
of outperformance and could signal headwinds facing the broader economy That said, a solid current account surplus and high real
interest rates should provide some support
TABLE: CURRENCY FORECAST15
Outlook On External Position 18
TABLE: MAIN IMPORT AND EXPORT PARTNERS18
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE18
TABLE: MAIN IMPORTS AND EXPORTS18
Chapter 2: 10-Year Forecast 21
The Philippine Economy To 2025 21
Potential For Higher Investment Rate To Sustain Economic Growth21
Ongoing political and economic reforms, as well as increasing foreign investor interest, will help to speed up investment growth in the
Philippines This will in turn enable the country to sustain its strong growth trajectory over the coming years As such, we forecast the
Philippines' real GDP growth to average 58% over the period from 2015 to 2024, up from our initial forecast of 52%
TABLE: LONG-TERM MACROECONOMIC FORECASTS21
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index 25
Domestic Politics 26
China Relations Face Mounting Headwinds Amid Maritime Dispute26
The Philippines will continue to seek greater maritime security cooperation with other countries amid China's rising assertiveness in
the South China Sea, with the latest being the signing of a strategic partnership with Vietnam on November 17 2015 Meanwhile, the
arbitration case filed by the Philippines against China in relation to the dispute is set to continue, risking trade sanctions by China that
will hurt the Philippine economy
TABLE: POLITICAL OVERVIEW 26
Long-Term Political Outlook 28
Stable Politics For Now, But Political Challenges Remain28
The Philippines faces a number of political challenges over the coming years that, if handled successfully, could improve governance
However, given low income levels and high levels of inequality, we expect the political scene to remain vulnerable to intermittent
instances of turmoil
Chapter 4: Operational Risk 31
SWOT Analysis 31
Operational Risk Index 31
Operational Risk 32
TABLE: OPERATIONAL RISK SCORE32
Trade Procedures And Governance 33
TABLE: BREAKDOWN OF DOCUMENTATION33
TABLE: TRADE DOCUMENTATION, COST AND DURATION33
TABLE: ASIA - TRADE PROCEDURES AND GOVERNANCE RISK 34
Vulnerability To Crime 35
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook 39
Unfinished Business In 201639
TABLE: GLOBAL ASSUMPTIONS39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 40
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 41
TABLE: PHILIPPINES - MACROECONOMIC DATA and FORECASTS 43

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