UBS sees slower growth, weaker peso for 2017, 2018

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UBS sees slower growth, weaker peso for 2017, 2018
The global financial giant forecasts economic growth to slow to 5.6% next year and 6.0% in 2018 with the peso hitting 51 to the dollar next year and falling further to 55 in 2018

MANILA, Philippines – Switzerland-based Financial giant UBS forecasted slower growth for the Philippines and a weaker peso for the next two years as domestic demand slows while the global economy remains turbulent.

In its 2017 economic outlook, UBS forecasted real GDP growth of 5.6% and 6.0% in 2017 and 2018 respectively.

The investment bank noted that strong domestic demand and booming investment growth delivered better than expected real GDP growth this year but that the conditions that led to it are changing.  

“The drivers of this boom were likely election related spending (including a large fiscal impulse) and loose monetary conditions that fuelled credit growth. We expect both of these to reverse in 2017 as deficit projections show a smaller fiscal impulse, and global monetary conditions tighten,” the report read.

UBS sees the lack of room in the fiscal deficit as one of the main reasons behind this. It noted that ahead of the May elections, the fiscal deficit widened sharply – from just 0.9% of GDP in 2015 to 2.7% of GDP (seasonally adjusted) in Q2 2016.

“This provided a sizeable fiscal impulse (defined as the year-on-year change in the fiscal deficit) to spur growth. The government forecasts fiscal deficits of 3.0% of GDP in both 2017 and 2018 – as such there is little fiscal impulse coming through in 2017 (and none in 2018),” the report outlined.

The bank said, however, that the government’s push for big ticket infrastructure could allow fiscal policy to be more supportive of growth than the deficit implies, provided the projects remain on schedule.

“We doubt that this boost will come as early as 2017, infrastructure projects tend to be plagued by delays, but better traction on public projects could lift growth in 2018. There remains a risk that spending will front-run revenue raising – resulting in a higher deficit (and fiscal impulse) than forecast over the next two years,” UBS said.

Peso weakness

UBS also sees the peso experiencing some ”catch-up weakness, hitting 51.0 to the US dollar next year and 55.0 in 2018; as investors around the world pull their money out of developing markets following the long awaited US federal rate hike this month as well as the signaling of more hikes in 2017

Rising global oil prices, which UBS said helped keep inflation down in the Philippine is also factor.

The bank also expects oil prices to rebound to average $60 a barrel in 2017 and $70 a barrel in 2018.

“This should push up headline inflation in the Philippines, to above 3.0% in 2018. While this is within the Bangko Sentral ng Pilipinas’ (BSP) target band of 3.0% ± 1.0%, in the context of rising global rates…this should encourage rate hikes from BSP. We look for BSP to raise rates by 50 basis points in 2017 and by 50 basis points in 2018, following the Fed,” the report read.

UBS also noted that country’s current account balance has deteriorated sharply over the past 4 quarters as growth has accelerated.

“The current account balance was 4.3 percentage points of GDP smaller on the year in Q2 2016, falling into small deficit in seasonally adjusted terms The bank anticipates a recovery in the current account balance from this low – looking for a small surplus of 0.3% of GDP in 2017 as weaker domestic demand curbs import growth, but expects acceleration in growth in 2018 and rising oil prices to induce a deficit of 1.3% of GDP in 2018

Political relations with the next U.S. President as well as general US fiscal and trade policy, it added, are potential swing factors for Philippine goods and services exports.

The report continued: “These dynamics are likely to induce currency weakness. We expect growth to slow in the Philippines – while the external balance has deteriorated, removing a buffer to global capital flows as the Fed is due to raise rates. Rising inflation and higher oil prices will also hurt the Philippines, as it is a net oil importer.” – Rappler.com

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