Philippines economy poised to grow 7.1% this year

Out to outperform last year's feat.

According to J.P. Morgan, the Philippines’ strong growth performance last year is set to be repeated this year. Growth surged 6.8% in 2012 from 3.6% in 2011 and this year analyst have it forecast at 7.1% after upside GDP surprises in 1Q and 2Q.

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A sharp recovery in exports led growth last year, while this year government spending has driven it. Government spending should continue to support growth as activity moderates in 2H from its robust 1H pace.

BSP maintained its policy rate at 3.5% last week and kept a neutral tone. We had been expecting another 50bp cut in the special deposit account (SDA) rate this year, but this looks increasingly unlikely as reserve money and M3 growth have picked up quickly due to BSP’s new rules limiting access to SDAs by investment trust funds.

While the spike in money growth is probably only temporary (and so far is not transmitting to more general loan growth), BSP will likely be reluctant to lower SDA rates any further. We now expect
SDAs to remain at 2.0% into 2014.

The fiscal deficit widened in July but the government is on pace to meet its 2.0% of GDP deficit target this year. Along with strong growth, a 2% of GDP deficit will keep debt to GDP on a declining path.

We forecast debt to GDP to fall to 43% of GDP by the end of 2015 from 51.5% at the end of last year.

The constructive debt outlook combined with greater political certainty and a solid BoP position should lead to more rating upgrades in coming years.

In particular, we expect Moody’s to upgrade the Philippines to Baa3 this year, leaving the country rated investment grade by all three major agencies.