Yearender: High growth sustainable in 2017-- Department of Finance

MANILA, Jan. 2 - The Department of Finance (DOF) remains bullish on prospects for continued high growth in 2017 and onwards, and is committed to helping Malacanang pursue its accelerated spending program not only to sustain the economic momentum but, more importantly, to also spread its benefits to all sectors across all regions by way of more jobs and better living standards.

Finance Secretary Carlos Dominguez III said that despite the political noise in the first six months of the Duterte presidency, growth has remained on the upswing on the back of the country's rock-solid macroeconomic fundamentals.

He said the government remains on track in realizing its vision of lifting six million Filipinos from poverty and transforming the Philippines into a high middle-income country five years from now, with a per-capita gross national income (GNI) of $4,100, or where Thailand and China are today.

The highly optimistic outlook on the Philippines as one of Asia’s fastest-growing economies in the year ahead is apparently shared by credit raters and other international institutions such as S&P Global, the Asian Development Bank and the International Monetary Fund (IMF), he said.

Dominguez said the Duterte administration is likewise committed to pursuing the congressional approval of its proposed comprehensive tax reform program, the first in 30 years, to ensure the financial sustainability of the government’s unparalleled spending on infrastructure, human capital and social protection for the country’s most vulnerable sectors.

He said the economy’s strong showing in the third quarter with GDP growth at 7.1 percent, its best in three years, was apparently driven in part by the onset of the Duterte presidency’s strong spending on infrastructure and the recovery of the agriculture sector from the prolonged El Nino-induced drought.

“This means there will be no letup in the Duterte administration's commitment to spending big on urban and rural infrastructure as a growth driver, to guarantee sustained high—and inclusive—growth,” Dominguez said.

He said the government needs to invest heavily in programs that will transform the economy from a consumption- to an investment-driven one, and at a much higher level from the current investment rate of 20 percent of GDP, so the Philippines could be on the par with its more vibrant neighbors that invest between 30 percent and 40 percent of their respective GDPs.

Alongside spending more on infrastructure, human capital and social protection to sustain the economy’s growth momentum and attack poverty, Dominguez said the Duterte administration will also remain focused on other urgent measures such as fully implementing the Reproductive Health (RH) Law, modernizing agriculture to pull down food prices while increasing farmers’ incomes, and leveling the playing field for micro, small and medium scale enterprises (MSMEs).

Dominguez recalled that at the start of the new government, it put in place at once a 10-point socioeconomic agenda to let President Duterte deliver on his electoral mandate to sustain the growth momentum and make it a truly inclusive one over the next six years by spreading its benefits to all sectors across all regions.

Over the last six months, several institutions have painted a rosy outlook for the economy.

The Economic and Social Commission for Asia and the Pacific, the UN’s regional development arm, upgraded its 2016 growth forecast for the Philippines to 7 percent from 6 percent.

BMI Research, a unit of Fitch Ratings, expects an average growth rate of 6 percent over the next five years.

“We believe that President Duterte’s fiscal stimulus measures will be positive for economic growth as most of the increases in spending have been earmarked for infrastructure development and social services like healthcare, education and security, which will boost long-term productivity,” it said.

Debt watcher S&P Global Ratings said it expects the Philippine economy to grow 6.7 percent in 2016, faster than its previous forecast of 6.3 percent, and even has the potential to expand at a higher rate in 2017, despite the expected negative impact of would-be US President Trump’s protectionist policies, should he proceed to implement them next year.

Banking giant Hong Kong and Shanghai Banking Corp. also raised its growth forecast for the Philippines from 6.5 to 6.8 percent, on the strength of the high 7.1 percent expansion of the economy.

HSBC, in a report, said the better-than-expected GDP growth "points to the resilience of the Philippine economy in a soft global growth environment.”

Meanwhile, the Asian Development Bank (ADB) also upgraded the Philippines’ 2016 GDP growth forecast to 6.8 percent from 6.4 percent, which, according to its country economist Aekapol Chongvilaivan, was the result of the strong 7.1 percent third-quarter GDP growth.

IMF resident representative Shanaka Jayanath Peiris said the 7.1 percent growth rate was faster than the institution’s full-year growth forecast of 6.4 percent, which it had earlier projected in September. The 6.4 percent full-year forecast was already an upgrade from the IMF’s original projection of 6 percent.

“Therefore, we will mostly likely be revising up our growth forecast for 2016 in the next round of world economic outlook revisions, while the adjustments for 2017 and medium term will also depend on global developments and financial conditions that have become more uncertain lately,” Peiris said.

The country’s growth was faster than China’s 6.7 percent, Vietnam’s 6.4 percent, Indonesia’s 5 percent and Malaysia’s 4.3 percent.

Economists polled by Bloomberg project that the domestic economy is set to expand more than 6 percent until 2018 to rank among the fastest not only in Asia but in the world.

Barclays Plc in Singapore said the Philippines will remain an “outperformer in the region” and foreseen global risks “won’t fundamentally alter its prospects.”

First Grade Holdings Securities said the Philippines’ high growth rate for the July-September period was “a surprise for the financial markets,” but “it affirms our view that fundamentals remain intact despite the political noise.”

As for the decline of the value of the peso vis-à-vis the US dollar and the US interest rate hike, Dominguez said the country’s strong macroeconomic fundamentals would enable the economy to survive external shocks such as higher US interest rates, which is the primary reason for the recent weakening of the peso along with other currencies in the region.

Finance Undersecretary Gil Beltran, the DOF’s chief economist, has said that the overall weakening of the peso and other Asian currencies was an overreaction by fund managers to the earlier market speculations on the US Federal Reserve rates, which were later raised in mid-December.

Now that the Fed is on the way to “normalize” interest rates, Beltran said, "the days of cheap financing and large capital inflows are coming to an end."

He has noted that "of 12 Asian countries, the Philippine peso has been one of the less volatile currencies, with standard deviation-mean ratio relative to the US$ of 5.0 percent from 2000 to November 24, 2016 compared with the Asian average of 7 percent."

Beltran has said emerging economies with excess savings like the Philippines are not dependent on the regime of cheap financing resulting from the post-2008 financial crisis move by the US Federal Reserve to cut rates as a monetary stimulus to ignite the United States' economic recovery.

He said the strengthening of the greenback against the peso “is expected as an impact of the Fed normalization.”

“The peso is just normalizing. It was P57 per the US dollar in 2004. All other currencies are moving in the same direction,” Beltran said.

Foreign analysts share Beltran’s assessment, with Citigroup saying that a P50:$1 rate in the next six to 12 months should be no cause for alarm because this adjustment is needed for the currency to stay regionally competitive.

“This is not a Philippine peso signal of an imminent crisis of fundamentals but merely a repricing of macro risks,” Citi Philippines economist Jun Trinidad said.

Trinidad said “recent global developments triggered by the US election outcome and prospective Fed hiking cycle prompting rising US treasuries resulted in a stronger US dollar outlook that compelled the rest of the world to re-adjust.”

Bloomberg, meanwhile, reported that countries like the Philippines and Thailand are expected to perform better as US interest rates keep climbing because they have significantly increased their foreign exchange reserves over the years, creating buffers to help them sail through the currency volatility.

The IMF has forecast Thailand’s reserves at $163.3 billion by yearend, compared with the $64.9 billion needed, according to the IMF's Assessing Reserve Adequacy (ADA) gauge, while the Philippines was projected to accumulate $84 billion against a $31 billion ADA requirement, said a Bloomberg report.

The ADA is supposed to incorporate a country’s short-term debt with money supply, imports and investment flows.

Tsutomu Soma, general manager of the fixed income department of SBI Securities Co. has told Bloomberg that currencies most vulnerable to attack are those from countries with less reserves.

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore had also told Bloomberg that “both Thailand and the Philippines increased their reserves in the last couple of years and have adequate buffers to intervene to smooth currency volatility." (DOF)


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