PH economy still on pace to hit 2019 government targets — ADB

The Philippine economy, despite its weak showing in the first half of the year, is still on pace to hit the lower band of the 2019 growth targets set by the government — with GDP expected to grow to the tune of 6.0% for the year. This growth implies that the economy will grow at a rate of 6.5% in the latter half of 2019. Should these estimates materialize, the country will be the seventh fastest growing economy in Asia — just behind Cambodia (7.0%), Vietnam (6.8%), Myanmar (6.6%), India (6.5%), Laos (6.2%), and China (6.2%). These forecasts are based on the recent Asian Development Outlook (ADO) update released by The Asian Development Bank (ADB).

2019 growth forecast downgraded due to headwinds
The ADB initially pegged the Philippine economy to grow at a faster rate at the start of the year. In the April issue of the ADO update, the country was estimated to grow at a rate of 6.4%. In the July iteration of the report, growth expectations were tempered down to 6.2%. Finally, projections were again slashed to 6.0% in the September update. The ADB attributes these cuts to two major headwinds that the country’s economy is facing: (1) a slowdown in the overall regional economy and (2) plateauing domestic investments.

Slowdown in the overall regional economy
The Philippines is not the only economy in the region experiencing a slowdown in economic growth. In fact, the September ADO update shows that the ADB downgraded its initial growth expectations for the entire Southeast Asian (SEA) Region — from 4.9% down to 4.5%. Other Asian economies outside of SEA have also received downgrades. The most notable of these countries are India (from 7.2% down to 6.5%) and China (from 6.3% down to 6.2%).

The ongoing trade war between the United States and China played a large part in this regional slowdown. As of September, approximately $700 billion worth of tariffs have been levied by both world powers — significantly dampening the free trade in the region (SEE: How the escalating US-China trade war can benefit the PH property markets). The tension from the trade war has also made investors more wary of investing capital in the region.

Plateauing domestic investment
To make matters worse, the country is also suffering from plateauing levels of domestic investment. The key culprit — anemic government spending due to a delayed government budget.

The government budget for 2019 was almost four months delayed as the ₱3.7 trillion 2019 General Appropriations Act (GAA) was only enacted into law by late April. As a result, government agencies could not disburse any funds from January to April of the year. On top of this delay, a 45 day ban on government expenditures was also in play due to the midterm elections. The combination of both these factors essentially mean that the big ticket infrastructure projects of the government were essentially delayed for almost six months.

The effects of the reduced government spending in the first half of 2019 also spilled over to the private sector. Domestic investors were waiting for the developments in the government’s flagship ‘Build Build Build’ program before investing more capital into the country. Thus, the delay in these infrastructure projects also led to delays in private domestic investments.

The slowdown in both the regional economy and in domestic investments played large parts in the economy’s disappointing 1H 2019 growth of 5.6%.

Reasons for optimism
Despite these headwinds, the country’s economy remains resilient as its strong macroeconomic fundamentals remain in tact. In addition, there are several pending economic catalysts in the pipeline, which could propel the economy into new heights. In fact, ADB expects the country’s growth to pick up to 6.2% next year. This growth rate puts the country’s economy in pace to breach the $1 trillion mark by 2032 (SEE: HIS Markit: Philippines to be a trillion dollar economy by 2032, The Philippine Daily Inquirer).

Strong macroeconomic fundamentals
Strong domestic consumption continues to keep the country’s economy afloat as usual. Historically, household final consumption expenditure (HFCE) has accounted for almost 70% of Philippine GDP. Moving forward, HFCE is expected to remain strong due to three main drivers: (1) Rising levels of disposable income, (2) Strong OFW dollar remittances, and (3) Stable levels of inflation.

The favorable macroeconomic policies in place by the Bangko Sentral ng Pilipinas (BSP) has also allowed helped support the country’s economy during these turbulent times. In the past six months alone, the BSP has already slashed its key policy rates by almost 50 basis points, with at least five more rate cuts worth another 125 basis points expected in the near future . On top of these cuts, the BSP has also mulled reducing the minimum required reserve ratio for banks. These expansionary policies have injected much needed liquidity into the financial markets (SEE: BSP cuts key rates; More to come in the near future, PropertyAccess).

Pending economic catalysts
Moving forward, the government already has several measures in the pipeline which would tackle the plateauing domestic investments in the country.

For one, the government is already accelerating its disbursements in order to offset the effects of the delayed budget. The Department of Finance (DOF) and Congress are also taking the necessary steps to ensure that the 2020 General Appropriations Bill (GAB) does not suffer the same fate as the 2019 budget. Through these measures, the government expects PH GDP to bounce back in the coming years. In fact, the National Economic Development Authority (NEDA) Secretary Ernesto Pernia estimates that the economy would have grown by 6.5% in the first half of 2019 had the government budget been passed on time (SEE: Market hopeful that PH GDP will bounce back in the 2nd half of 2019, PropertyAccess).

In addition, Congress — upon the advice of the Department of Finance — has already filed several tax reform bills, which could help stimulate private investments. One of these bills is the Corporate Income Tax and Incentives Reform Act (CITRA), which would reduce corporate tax rates to 20% by 2020. Another proposed reform is the Passive Income and Financial Intermediary Act (PIFTA) which seeks to set final tax for certain passive investments at a uniform rate of 15% (SEE: The Comprehensive Tax Reform Program and its potential effects on the real estate markets, PropertyAccess).

These economic reforms should serve as important catalysts in order to boost the economy’s growth in the coming years.