Friday, 21 November 2008

Philippines in stronger position now to withstand global downturn

Lee C. Chipongian
The Manila Bulletin

The consensus among financial and banking giants, including multilateral funding agencies, is that the Philippines is "well-positioned" to withstand the global downturn for this year and in 2009.

"The Philippines is in a relatively strong position to weather the global downturn with 76 percent of the economy driven by private consumption and 50 percent by services, which are less vulnerable to external shocks," according to JP Morgan’s market strategist Kelly Lim-Bate.

JP Morgan expects the economy to grow by 4.6 percent this year, more optimistic than government’s growth targets of 4.1-4.8 percent, while the forecast for 2009 is four percent, mid-range of the official target of 3.7-4.7 percent.

"Pillars of growth should come from OFW remittances and the growing BPO (business process outsourcing) sector," said Bate. Remittances are expected to reach about $ 17 billion next year while the BPO revenues are targeted at $ 10 billion. "We expect remittances to remain resilient due to the growing proportion of permanent overseas workers and deployed white collar workers."

Citi Financial’s economist Jun Trinidad said the government’s growth downgrade is still considered positive.

"We think the extent of the downside would depend largely on the slack likely to come from narrower contribution of net exports to GDP (gross domestic product). The export drop with weaker external demand and declining commodity prices, net of imports the key source of payments outflow, would determine potential output and employment losses in the near-term," the Citi report said.

Citi expects GDP to grow to only 1.6 percent in 2009, lower than previous forecast of 3.5 percent. "Less buoyant remittances would also be a risk to consumption," said Trinidad.

As for other industries, Bate said the "global downturn should prompt companies to improve cost efficiency and offshore their businesses, especially in the medium to long term." JP Morgan also expects earnings downgrades to continue but that the "winners" in this market environment are companies that have formidable balance sheets, strong cash flow generation, management quality, and brand equity, which should all translate to higher return on invested capital.

"The main weaknesses in the Philippines ‘ dynamic are the lack of foreign direct investments and the small and illiquid stock market," Bate added. But, the analyst said, the Philippines will be "cushioned" by the monetary and fiscal flexibility. Inflation rate, for one thing, is expected to decelerate to single-digit levels in the first quarter next year. This gives the government more leeway to pump-prime to encourage growth.

As for monetary directions, Citi’s Trinidad said policy support to ensure a soft landing for GDP might require lower policy rates later to complement the liquidity injection by way of the bank reserve cut. The BSP cut reserve requirements by two-percentage point, thus releasing P60 billion into the system.

"Government’s GDP downgrade next year flagged weaker domestic demand prospects that also ascertain inflation’s downtrend to single-digit rate in 2009,†said Citi. "It’s our view that double-digit inflation may delay the timetable for policy rate adjustments to mid-first half next year."

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