Market hopeful that PH GDP will bounce back in the 2nd half of 2019
Despite a lackluster showing in the first two quarters of 2019, industry experts and analysts are still hopeful that the Philippine economy will bounce back stronger than ever in the latter half of the year — taking back its position as one of the fastest growing economies in Asia and in the world. This sentiment was echoed by a recent report entitled “The Market Call” which was published by the First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P). The report forecasts PH gross domestic product (GDP) to grow by at least 6% per annum in the coming years on the back of three key pillars: (1) strong domestic household consumption, (2) accelerated government spending, and (3) robust private investment expenditure. This estimate, should it materialize, will place the country at par with the other rapidly growing economies in the world such as India, Bangladesh, Cambodia, Laos, China and Viet Nam.
The lackluster economic growth in the first half of 2019
The Philippine economy has been sluggish, to say the least, in the first half of 2019 after growing just 5.6% (SEE: Philippine GDP drops to 4 year low in Q1 2019, Rappler) and 5.5% (SEE: Philippine GDP growth still below target at 5.5% in Q2 2019, Rappler) in the first two quarters respectively — a far cry from the 6.5% and 6.2% growth recorded in the same period in 2018. These figures represent the slowest pace at which the economy has grown in the past four years. The main culprit for the economic slowdown? A delay in the enactment of the 2019 government budget.
Analysts both within and outside the country can agree on one thing: The fourth month delay in the passage of the General Appropriation Act (GAA) of 2019 severely dampened the growth prospects of the Philippine economy (SEE: ADB cuts PH growth forecast for 2019 due to budget delay, Manila Bulletin). The ₱3.7 trillion 2019 budget, which was only enacted into law by President Rodrigo Duterte in April 2019, was not available for use in the first quarter of the year. As a result, government spending on infrastructure and other projects had to be sidelined for at least three months. To make matters worse, an election ban which lasted until May 2019 made it difficult for government agencies to utilize their allocated funds. The combination of these two factors has led to a slowdown in government spending from January until May, which in turn decreased economic growth by at least one percentage point.
The growth prospects of the economy for the second half of 2019 and beyond
Despite the poor showing in the first half, the market remains optimistic regarding the overall health of the economy. Analysts believe that the problems regarding government expenditures is temporary and — more importantly — the country’s macroeconomic fundamentals remain in tact. Thus, the Philippines is poised to regain its position as one of the fastest growing economies in Asia in the near future (SEE: Capital Economics: PH to remain among the fastest growing economies in Asia, The Philippine Star) due to three main factors: (1) Strong domestic household consumption, (2) Accelerated government spending, and (3) Robust private sector investment.
Pillar 1: Strong Domestic Household Consumption
Consumption spending has long been one of the most (if not the most) important pillars of the Philippine economy. In fact — historically, household final consumption expenditure has accounted for roughly 70% of the country’s total GDP. As such, consumption growth is still key to the overall economy’s growth.
Domestic household final consumption expenditure (HFCE) is expected to remain strong and will be driven by three main factors for the coming years:
1. Rising levels of disposable income. Annual per capita income is expected to reach $5,000 (₱270,000) by 2030.
2. Strong OFW dollar remittances. In the first five months of 2019, Overseas Filipino remittances reached $13.7 billion (₱712 billion).
3. Stable levels of inflation. Inflation has settled to 2.4% in July 2019, which is well within the 2% to 4% threshold set by the Banko Sentral ng Pilipinas (BSP).
Pillar 2: Accelerated Government Spending
During a recent press conference, National Economic and Development Authority (NEDA) Secretary Ernesto Pernia claimed that Philippine economic growth would have reached 6.5% in the first half of 2019, had the General Appropriations Act (GAA) been passed on time (SEE: Economic growth slows further in Q2, CNN Philippines). Some analysts see this statement as a good sign that the Philippine economy will get back on track once government spending picks up within the year and in the coming years.
Moving forward, the Department of Budget and Management (DBM) is working hard to ensure that the budget for 2020 will not have the same fate as the 2019 budget. In fact — as early as the first week of August, the proposed 2020 budget, which is estimated to be worth more than ₱4 trillion, has already been approved by President Duterte (SEE: Duterte approves proposed P 4.1 T national budget for 2020, ABS CBN News). The bill will then be submitted to Congress for approval. Given the fact that the President controls the supermajority in both the House and the Senate, it is reasonable to assume that there will be no delays in the upcoming year’s budget.
Pillar 3: Robust Private Sector Investment
Staying true to his word, Banko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno once again cut the policy rates by another 25 basis points (from 4.50% to 4.25%) — just three months after slashing the rates by 25 basis points last May. This move is in line with previous promises of Diokno to inject some much needed liquidity into the market by easing up the BSP’s macroeconomic policies (SEE: BSP cuts key rates; more to come in the near future, PropertyAccess).
The liquidity generated by these successive rate cuts is expected to drive down interest rates, which — in turn — will stimulate private investment.