Philippine GDP growth reached 3.4% in Q2 2011

GDP growth reached 3.4% YoY in 2Q, in line with our expectation (DBSf: 3.5%, Consensus: 4.1%). 1Q GDP growth has also been revised down to 4.6% (4.9% previously), putting 1H growth at just 4%. The weak set of results comes as no surprise as a high base effect in 2010, coupled less-than-encouraging export numbers combined to result in declining headline growth. On the domestic front, gross fixed capital formation (GFCF) declined by 4.1%, snapping six consecutive quarters of growth.

Growth in the second half of the year will depend on several factors. Firstly, investment growth has a good chance of picking up. The infrastructure private-public partnerships (PPP) that has been delayed for months may finally contribute positively to GFCF as the government aims to have the bulk of projects scheduled for bidding by the end of the year.

This implies that the PPP projects may become a tailwind starting in 4Q. The prospect for greater foreign direct investment (FDI) inflow is also positive. Approved FDI in 2Q rebounded to PHP40.6bn, around 200% higher compared to the same period last year. With indications that the government is taking a more active role in attracting foreign funds, investment commitments and realization should remain strong.

Weak external demand has already materialized in the form of poor export figures in recent months and remains the biggest downside risk to the Philippine economy. With no clear signs that the US and eurozone are on a recovery path and sentiment still fragile; the worst case scenario would be a downward spiral in sentiment and external demand.

Plainly, this would impact on outbound shipments and even remittances. Our forecast treads the middle line, allowing for a gradual improvement in external demand towards the end of the year. Risks to our 4.8% growth forecast for 2011 are even on both the upside and the downside, depending on how the external situation plays out.

With this set of weak GDP numbers and recent uninspiring export figures, the focus of the central bank is likely to remain firmly on growth. As such, it is looking increasingly unlikely that the BSP will opt to hike rates at the upcoming monetary policy meeting next week.