BSP sees slower growth until 2024

THE PHILIPPINE ECONOMY is expected to hit the government’s growth target this year, but the central bank sees slower expansion through 2024 due to the impact of high interest rates.

In its latest monetary policy report, the Bangko Sentral ng Pilipinas (BSP) said gross domestic product (GDP) growth will be likely within the 6.5-7.5% target of the Development Budget Coordination Committee (DBCC).   

The Philippine economy expanded by 7.6% in the third quarter, bringing the year-to-date average growth to 7.7%.

“But economic headwinds could result in slower GDP growth in 2023 and 2024,” the BSP said. “The forecast for 2024 is lower, reflecting the slower external demand as well as the impact of the BSP’s monetary policy tightening.” 

The BSP did not give its forecast but the DBCC targets 6.5-8% GDP growth in 2023 and 2024.

The BSP last week increased the benchmark policy rate by 75 basis points (bps) to 5%, the highest in nearly 14 years. Rates on the overnight deposit and lending facilities were also increased to 4.5% and 5.5%, respectively.

Since May, the Monetary Board has raised policy rates by 300 bps to curb inflation and support the peso.    

The BSP said domestic economic activity has recovered above its pre-pandemic level, amid the easing of mobility restrictions and resumption of face-to-face classes.

“Domestic growth is seen to remain robust over the succeeding quarters in view of looser mobility restrictions, strong capital formation, return of domestic and foreign tourism, as well as greater MSME (micro, small and medium enterprises) activities induced by the resumption of face-to-face classes,” it said.

The implementation of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, Financial Institutions Strategic Transfer (FIST) Act, and the second tranche in the reduction in personal income taxes will further boost the domestic outlook in 2023 and 2024, the BSP said.

The BSP noted the economy is expected to operate at “slightly above potential.”

“Estimates from the BSP’s Policy Analysis Model for the Philippines (PAMPh) 4 indicate that the output gap is projected to turn positive in 2023, reflecting largely the sustained expansion in 2022. The output gap will return to broadly neutral territory in 2024 as the impact of policy interest rate adjustments take hold on the economy,” it said.

“Improved external trade competitiveness and sustained remittances amid peso depreciation, notwithstanding the slowdown in global growth outlook, could drive the higher domestic output gap. Meanwhile, potential output is expected to sustain its recovery given the continued reopening of the economy, improvements in labor conditions, and investment growth.”

The BSP said inflation is projected to remain elevated in the near term, and above the 2-4% target range until the second quarter of 2023.

“Inflation is seen to decelerate back to within the target range by Q3 2023 and approach the low end of the target range in Q4 2023 to Q1 2024 due to negative base effects, before stabilizing at the midpoint of the target by Q2 2024,” it said.

“The projected deceleration of the inflation path can be attributed to the easing global oil and non-oil prices and negative base effects from transport fare adjustments in 2022 as well as the impact of BSP’s cumulative policy rate adjustments.”

The BSP last week raised its average baseline inflation projection to 5.8% this year, from 5.4% previously. It also hiked the inflation forecast to 4.3% from 4.1% for 2023, while lowering the 2024 forecast to 3.1% from 3.2%.

“However, high inflation remains to be a risk. We forecast inflation in November to hit 7.8% or even higher, with upside risks still largely from food,” China Banking Corp. Chief Economist Domini S. Velasquez said.

October inflation rose to a near 14-year high of 7.7% in October, from 6.9% in September and 4% a year earlier. Excluding food and fuel prices, core inflation grew to 5.9% in October.   

“We cannot say it will not exceed 8% definitely as vegetable and meat prices are on an uptrend. We might see some pressure still as we approach Christmas where demand tends to increase,” Ms. Velasquez said.   

Security Bank Corp. Chief Economist Robert Dan J. Roces said the growth outturn in the third quarter points to a “comfortable space” to do more rate hikes.   

“Forward guidance so far points to more tightening ahead with the central bank still having a lot of work to do, as core inflation remains above-target and still climbing — indicating stronger pass-through of food and energy prices amid demand-side appetite — which continues to lift price expectations,” he said.

If the US Federal Reserve continues policy tightening, BSP Governor Felipe M. Medalla told Reuters the central bank will have to raise interest rates to prevent the peso’s weakness from further stoking inflation.   

The US Federal Reserve has increased borrowing costs by 375 bps since March, which brought the policy rate to 3.75-4%.

“We think that BSP will continue to be aggressive, matching the Fed in December of 50 bps. Until early next year, the BSP will likely move in lockstep with the Fed both to prevent the peso from depreciating and also as domestic core prices continue to accelerate,” Ms. Velasquez said.   

Asian Institute of Management economist John Paolo R. Rivera noted that as inflation has not yet peaked and as the Fed is showing signs of slowing down, the BSP may still hike rates but not as aggressive as 75 bps.   

“However, should inflation uptick faster as expected, BSP can use other monetary tools to temper inflation,” he added. — KBT