Fearless Forecast for 2019: GDP growth at 6%, inflation at 2.5% — BSP Gov

In a recent interview, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno forecasted that annual GDP growth for 2019 would recover to around 6.0% — the lower band of the government’s revised growth targets. He added that annual inflation would settle down to 2.5% — well within the government's target of 2% to 4%.

2019 GDP growth forecast and its future implications
The Philippine economy has been in a slump in 2019 — growing at 5.6% and 5.5% in the first quarter and second quarter of 2019 respectively. The BSP governor expects growth to pick up in the latter half of the year in order to bring the annual average to 6.0%. These figures represent a significant dropoff compared to the average GDP growth rates ranging from 6.5% to 7.0% posted from 2010 until 2017.

The slump in 2019 cam be attributed to both external and internal factors, which plagued the country’s economy. For one, the ongoing trade war between the United States and China has severely dampened the growth of the global economy as a whole.

To make matters worse, government expenditure has been below par this year due to two main reasons. First, the 2019 General Appropriations Act (the government budget) was one quarter delayed — being passed only in April of 2019. Second, an election ban prevented government agencies from spending on big ticket projects up until the end of the May 2019 midterm elections. In essence, government projects were put on hold for almost half of 2019.

The combination of both these external and internal factors took a significant toll on the country’s growth — leading to a subpar GDP growth of 5.6% for the first half of 2019.

Luckily for the Philippines, most of the internal factors plaguing the economy are already gone. For one, the government is already accelerating its spending for the latter half of 2019. The Department of Finance (DOF) and Congress are also working hard to ensure that the 2020 national budget will be passed on time. As a result, the Philippine economy is seen to bounce back and is expected to grow at a rate of 6.5% in the 2nd half of 2019.

It is also important to note that the Philippine GDP, despite the setback in 2019, is still on track to reach $700 billion by 2027 and breach the one trillion dollar mark by 2032.

2019 inflation forecast and its future implications
Inflation has significantly cooled down in 2019. After roaring out of control in the previous year — with an annual average of 5.2% and even reaching 7% at its peak, the Bangko Sentral governor now expects this year’s average inflation rate to settle at a much more manageable level of 2.5%.

The decline in inflation is mainly due to the fact that the factors which led to the spike in 2018 no longer exist in 2019:

1. Excise taxes. The passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Law in 2018 introduced a new set of excise taxes, which led to higher prices for certain basic commodities. This price increase, however, is a one-time phenomenon and will not happen again in the succeeding years.

2. Depreciating peso. The Philippine Peso took a beating in 2018 — depreciating from around ₱42 per dollar to as high as ₱54 per dollar. This rapid depreciation caused the country’s imports of oil and other commodities to be more expensive in peso terms. Luckily, the exchange rate has stabilized to around ₱51 to ₱52 per dollar in 2019.

3. Rice shortage. The country also experienced a rice shortage in the latter half of 2018 — causing an increase in rice prices. The rice tariffication law, which lifted import quotas on rice, helped remedy this shortage as imported rice flooded the market this year.

An inflation rate of 2.5% — which is well within the 2-4% target of the government — gives the Bangko Sentral a lot of room to slash the policy rates and reduce the reserve ratio requirement in the succeeding years. These moved would inject a lot of liquidity into the country’s capital markets and would help stimulate more investments in the economy.