Growth may fall below 6% in 2025

Philippine economic growth could fall below 6% in 2025 amid a “gentle” recovery in domestic demand and expectations of a widening trade deficit, Bank of America (BofA) said. 

BofA Securities economist for the Philippines Jojo Gonzales said they forecast Philippine gross domestic product (GDP) to grow by 5.9% in 2025.

This would narrowly miss the government’s revised 6-8% growth target next year.

The economy expanded by a slower-than-expected 5.2% in the third quarter, its weakest growth in five quarters.

In the nine-month period, GDP growth averaged 5.8%, slower than the 6% print a year ago.

Earlier this month, the Development Budget Coordination Committee tweaked its economic growth targets to account for “evolving domestic and global uncertainties.”

“While we expect a gentle recovery in private consumption and investments over the next year, the growth in government spending is likely to be muted, and a wider net trade deficit is anticipated,” Mr. Gonzales told BusinessWorld in an e-mail.

In the third quarter, growth in government spending slowed to 5% from 11.9% in the previous quarter.

Latest data from the Philippine Statistics Authority (PSA) showed that the country’s trade deficit ballooned to $5.8 billion in October, the widest gap in over two years.

Meanwhile, BofA said it expects inflation to average 3% next year, well within the central bank’s 2-4% target.

The Bangko Sentral ng Pilipinas (BSP) expects inflation to average 3.3% in 2025. The central bank said that risks to the inflation outlook for next year remain tilted to the upside.

Headline inflation averaged 3.2% in the 11-month period, according to latest data from the PSA.

“A weaker peso remains a risk to this forecast, though softer oil prices will likely provide a cushion to negate the impact of the weaker currency,” Mr. Gonzales said.

BofA expects the dollar strength to persist next year, with the peso potentially breaching the P61 mark.

“The US dollar will remain stronger in 2025, and our end-2025 forecast is P61,” Mr. Gonzales said.

So far this year, the peso has hit a record-low P59-per-dollar level thrice.

BSP Governor Eli M. Remolona, Jr. earlier said they are watching the peso closely and have been a bit more active in the markets than usual.

The BSP had to intervene in small amounts in the past few months amid the stronger dollar after Donald J. Trump won as US President.

Meanwhile, BofA estimates that the central bank will deliver up to 75 basis points (bps) worth of rate cuts next year.

“This will bring down the policy rate to 5% (by end-2025),” Mr. Gonzales said.

Last week, the Monetary Board reduced borrowing costs by 25 bps at its final policy review of the year, bringing the key rate to 5.75%.

The central bank has slashed rates by a total of 75 bps this year since it began its easing cycle in August.

Mr. Remolona earlier said delivering 100 bps worth of rate cuts next year might be “too much.”

The central bank will likely keep reducing rates in “baby steps” as it is still carefully monitoring upside risks to inflation, the BSP chief added.

“We also expect the Fed rate to settle at 4% — one cut in December and two cuts in the first half of 2025,” Mr. Gonzales added.

The Fed continued cuts in December after a period of aggressive rate hikes but signaled fewer cuts in 2025. Investors are now focused on how gradually the US central bank would cut rates next year, Reuters reported.

While a benign US inflation reading on Friday eased some concerns about the pace of cuts next year, markets are still pricing in just about 35 bps worth of easing for 2025.

US investors are preparing for a swathe of changes in 2025 — from tariffs and deregulation to tax policy — that will ripple through markets as Mr. Trump returns to the White House in January.

Source: Business World

PH tourism recovery lags behind peers

International tourism recovery in Asia has been uneven, with the Philippines still lagging due to its heavy reliance on Chinese tourists, a Bank of America (BofA) Global Research said.

In terms of tourism recovery, countries like Japan and Vietnam are leading the way, BofA said in a report, while China, Hong Kong and the Philippines are lagging.

"Hong Kong and the Philippines have been hurt by the slow return of Chinese travelers, who increasingly prefer domestic destinations," BofA said.

Tourist arrivals in the Philippines, Hong Kong and Taiwan remain below 80 percent of pre-Covid levels.

China, meanwhile, stands out as an outlier due to its significantly delayed reopening, with foreign border entries/exits at less than 40 percent of pre-Covid levels as of the end of 2023.

Chinese residents resumed traveling abroad in 2023, much later than visitors from other countries, impacting tourism recovery in destinations like the Philippines and Hong Kong that rely heavily on Chinese tourists.

BofA said that Chinese arrivals in the Philippines are only at 20 to 30 percent of pre-Covid levels, which is lower than other regions.

It noted that besides the delayed reopening of Chinese borders, the shifting preferences of Chinese consumers are also influencing trends.

It revealed that Chinese travelers are showing more interest in domestic cities with unique cultural experiences, which has slowed their return to international destinations.

"Accessibility is an important factor when it comes to travel decisions ... this helps explain why some regions have seen faster recovery while the others have not," it said.

BofA also pointed out the impact of currency fluctuations on tourism recovery in certain countries.

Although Asia has typically been more affordable than Europe and North America, BofA said that the recent sharp depreciation of some Asian currencies against the US dollar has made the region even more attractive to tourists.

It was explained that the recent tourist arrivals, compared to local currency performance against the US dollar in 2023, revealed that Japan's tourism benefited from a notable decline in the value of the yen, and Vietnam may have benefited from a weaker Vietnamese dong.

In contrast, the tourism sectors in Taiwan, the Philippines and Hong Kong, which had relatively stable currencies in 2023, did not experience this advantage.

"Looking ahead, we think the FX (foreign exchange) factor bodes well for the region's tourism outlook, while the return of Chinese visitors might mean a bumpy recovery," BofA said.

BofA anticipates that currencies across Asia will generally strengthen against the US dollar over the next two years but remain relatively weak compared to historical levels.

Consequently, countries with weaker currencies, especially Japan, are expected to continue attracting tourists in the near and medium term.

Source: Manila Times

Growth seen to slow in Q4

The Philippines is unlikely to hit its growth target of 6-7% this year as economic activity may slow in the fourth quarter.

The Bank of America (BofA) Global Research raised its Philippine gross domestic product (GDP) growth forecast to 5.4% this year from 4.8% previously.   

“We place 2023 GDP growth at 5.4%, up from 4.8% previously, and still implies slightly slower growth in the fourth quarter of 2023,” the bank said in a report dated Nov. 9.

If realized, this would be slower than the 7.6% growth recorded in 2022.

“We think the surge in government spending seen in the third quarter may not extend into the fourth quarter given the constraint posed by the budget and the fiscal deficit,” it added.

The Philippine economy grew by 5.9% in the third quarter from the 4.3% in the second quarter. For the first nine months, economic growth averaged 5.5%.

The economy will need to grow by 7.2% year on year in the fourth quarter to reach the low end of the government’s 6-7% target.

At the same time, the BofA Global Research raised its Philippine GDP forecast for 2024 to 5.4% from 5% previously. This is also below the government’s 6.5-8% target.

The bank trimmed its Philippine inflation forecasts following the lower-than-expected inflation print in October.

It now sees inflation averaging 6% this year (from 6.1% previously) and at 3.3% in 2024 (from 3.5%).

Annual headline inflation slowed to a three-month low of 4.9% in October from 6.1% in September. But it still marked the 19th straight month that inflation breached the central bank’s 2-4% target band. For the 10-month period, inflation averaged 6.4%.   

BofA Global Research expects the BSP to maintain the key interest rate at 6.5% this year, before cutting by 100 basis points (bps) to 5.5% in 2024. 

HIGH RATES

Meanwhile, the ASEAN+3 Macroeconomic Research Office (AMRO) said the BSP can keep the key policy rate at its current level as inflation is expected to further ease.

“According to AMRO’s baseline projections, the output gap is expected to remain positive while inflation should gradually return to its target band in 2024, which suggests that the current tightened monetary policy stance is appropriate,” AMRO said in its latest Annual Consultation Report.

“The policy rate can be maintained at the current level to keep monetary policy tight, as it is above the neutral rate and the projected decline in inflation will keep the policy rate positive in real terms,” it added.

At its policy meeting earlier this month, the BSP kept its target reverse repurchase rate at 6.5%, the highest in 16 years.

Since May 2022, the Monetary Board has raised borrowing costs by a total of 450 bps.

The Monetary Board will have its last policy meeting for the year on Dec. 14.

AMRO’s model showed that the central bank’s current policy rate of 6.5% is “appropriate” based on the think tank’s growth and inflation forecasts for this year.

“The BSP’s monetary policy tightening between 2022 and October 2023 has been timely and necessary, as inflation was also demand-driven according to AMRO’s findings,” it added.

However, AMRO also said that if inflation remains elevated and above the target range for a prolonged period, there may be a need for additional monetary tightening.

“However, the decision should take into account the delayed transmission of past tightening, and the impact of additional rate hikes on financial stability — in particular, the financial health of vulnerable borrowers such as households and MSMEs (micro, small, and medium enterprises),” it said.

“In a different risk scenario, if downside risks were to result in a sharp and persistent economic slowdown in the coming quarters, monetary policy easing in coordination with a reallocation of budgetary funds to support vulnerable groups could be warranted. In that way, fiscal policy can provide support without derailing the fiscal consolidation plan,” it added.

The central bank said inflation could fall within the 2-4% target in the first quarter of 2024. However, BSP Governor Eli M. Remolona, Jr. earlier said inflation may pick up again to above 4% from March to July next year.

The think tank said that the government’s policy mix should be “flexible and data dependent.”

“Authorities should be vigilant in monitoring the evolving economic situation under high uncertainties, particularly with respect to price and growth developments,” it added.

It also recommended an “all-of-government approach” to address supply-side factors and help bring down inflation. Targeted subsidies may also be implemented to help lower-income groups cope with rising prices.

Also, AMRO said that the BSP can use macroprudential tools to strengthen financial stability.

“Additional macroprudential tools such as the debt-service-ratio may also be considered to ensure appropriate lending standards in light of more intensive competition in the consumer loan segment. In view of high nonperforming loan ratios which are pandemic-related, banks are encouraged to help households and MSMEs in distress to restructure their debts,” it said.

Source: Business World