MANILA, Philippines – Hongkong and Shanghai Banking Corp. (HSBC) has revised downwards its growth forecast for the Philippine economy this year to 5.6 percent from its earlier projection of 6.1 percent.
However, the British financial giant retained its 6.1 percent growth outlook for 2016.
In a report, HSBC economist Trinh Nguyen noted that the slowdown would be caused by weaker private spending due to higher prices, strong surge in imports, net exports deterioration, negative real interest rates, and cautious foreign investments in a run-up to the 2016 elections.
“Negative real interest rates will likely dampen capital inflows,” Trinh said.
“While we do not see a sharp reversal of funds, we also do not expect large portfolio inflows in the next two years, especially for carry or growth differential reasons,” the HSBC economist said.
Trinh said another risk is policy paralysis due to the upcoming 2016 elections. Public investment will likely slow down, although private consumption as well as private investment will pick up the slack. Slower government spending coupled with weaker household expenditure would drag the economy further.
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Inflation is also another risk as the Philippines continues to face short-term supply shocks. For example, the government already projected an electricity shortage for 2015. The decline of oil prices has helped offset price risks from various supply-side constraints.
Nonetheless, the Philippines has plenty of demand growth as the population is young and expanding.
The HSBC report however said tha there is a limit to consumption-oriented growth, especially when income growth channels are limited. Since 1999, gross fixed capital grew only 4.9 percent on average, less than the five percent assumption for even keeping up with the depreciation of capital.
“But we believe its pace will likely decelerate in the coming quarters. Thus far, the Public-Private Partnership (PPP) initiative has been lackluster, with the President having to re-bid one of the projects awarded,” Trinh said in the report.
The Bangko Sentral ng Pilipinas (BSP) is trying to keep policy rates on hold, as long as inflation remains within the two to five percent target in 2015.