Saturday, 30 January 2010

UBS sees Philippines growing 5% this year


... expects monetary tightening to be cautious

Election spending and lagged effects of still-loose fiscal and monetary policy settings are expected to drive a rebound in economic activity in the first half, resulting in a 5% growth in gross domestic product (GDP) this year, UBS Investment Research said in an analysis it released on Friday.

The UBS projection is more optimistic than the cautious 2.6%-3.6% target the government has set for this year.

UBS further cited post-storm rehabilitation and reconstruction that are expected to intensify this year, a recovery in exports and manufacturing, continued strong remittances from Filipinos overseas, and increasing consumer demand, as basis for its optimism this year.

It also noted that the National Economic and Development Authority (NEDA) itself had estimated that election spending would result in a 0.3-0.4 percentage point boost to GDP.

The government reported on Thursday that the economy grew by an 11-year-low 0.9% in 2009, weighed by agriculture damage inflicted by twin, successive storms that struck in September-October.

But risks from resurgent inflation, expected to reach 4.9% from an initial 3.9% estimate -- against the government's own projection of 4.7%, muddles the growth outlook this year.

It also said the expected prolonged dry spell due to El Niño, which "may be harsher than we hope," bears watching.

Moreover, UBS said, "because the Philippine economy decelerated less during the crisis, the rebound has been less sharp."

Such uncertainty, UBS said, led it to cap the expected rate tightening by monetary authorities to 50 basis points (bps) this year, starting in the second quarter.

Its projection is shared by NEDA.

Speaking to reporters in Malacañang on Friday, Dennis M. Arroyo, director of NEDA's National Planning and Policy Staff said, "In my view, the central bank may consider raising its rates after the second quarter because that is when we feel the Fed may decide to tighten its policy. It's a good thing to wait until the end of the second quarter."

While the Monetary Board last Thursday chose to keep the 4% overnight borrowing and 6% overnight lending rates that have been in place after a spate of rate cuts since December 2008 totalling 200 bps, as well as the rates for Special Deposit Account and bank reserve requirement, it did raise the short-term lending rate for banks under a rediscounting scheme to 4% from 3.5%” widely perceived as a token first move to exit the currently loose monetary policy.

UBS said monetary authorities could gradually raise banks' reserve requirement, currently at 19%, after the first rate hike this year. "We expect relatively benign inflation outcomes and growth sustainability concerns will prevent a more aggressive response," the UBS note read.

The government, under a new administration after the May national elections, is expected "to run a sustainable fiscal policy, following a period of fiscal loosening during 2009."

This, in turn, means "less of a growth boost for the economy as 2010 and 2011 unfold, but it should also imply less risk in terms of sharply higher bond yeild or a weaker currency," UBS said.

This, plus expectations that the pace of increase in manufacturing as the economy recovers will level off, means that growth will temper to 4.6% in 2011 from 5.0% this year.

A renewed commitment to improved fiscal management notwithstanding, the National Government is expected to post a P300-billion deficit this year, against the official P293-billion estimate.

"A wider deficit on continued revenue disappointment is possible, but with a return to more normal rates of economic growth, a better-than-expected…recovery in revenue growth is also in the cards."

While the government's increased spending to pump-prime the economy through the slump has been regarded as an expected measure by sovereign credit raters, the projected normalization of the economy is believed to put renewed emphasis on the government's chronically poor revenue collection.

Tax revenues slipped to P977.9 billion last year from P1.049 trillion in 2008 and against a P1.083-trillion target for 2009. Both the Internal Revenue and Customs bureaus had blamed the business slump amid the economic crisis for poor tax collection.

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