Slower economic recovery expected in second half

MANILA, Philippines — MUFG Bank Ltd. is expecting a slower recovery pace for the Philippines in the second half as financial tightening became a global phenomenon led by the hawkish US Federal Reserve.

“The financial tightening likely causes an overall lower Asia GDP growth in the second half. Specifically, we expect the recovery pace of India, Thailand, Malaysia and the Philippines to slow in the second half compared to the first half,” MUFG said in a report.

The Philippines emerged from the pandemic-induced recession with a gross domestic product (GDP) growth of 5.7 percent last year.

The country managed to sustain the recovery with a stronger-than-expected 8.3 percent expansion in the first quarter despite the surge in COVID cases.

“Strong GDP growth in the first quarter brought the economy back to pre-pandemic levels earlier than expected, but slower growth is expected on a year-on-year basis for the following quarters as low base effects fade and elevated levels of inflation affect the ongoing recovery in private consumption,” MUFG said.

The bank retained its GDP growth forecast for the Philippines at 6.5 percent for 2022 and at 6.2 percent for 2023 as it awaits the release of the GDP figures for the second quarter.

“We are not changing our view for now as greater downside risks have emerged since then (eg higher inflation, potential slowdown in external demand), which could balance out the stronger growth rate seen in the first quarter,” it said.

MUFG said the continuation of former president Rodrigo Duterte’s massive infrastructure program under the administration of President Marcos would be one of the key drivers of the economy.

It said inflationary pressures are mainly driven by higher prices of food and transport, and are starting to exhibit second-round effects, which are likely to result in further increases in the coming months.

The Cabinet-level Development Budget Coordination Committee (DBCC) has raised its inflation assumption to a range of 4.5 to 5.5 percent for this year amid continued external factors that weigh heavily on the local commodity basket.

Inflation averaged 4.4 percent in the first half after quickening to 6.1 percent in June from 5.4 percent in May, breaching the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP).

After hiking rates by 50 basis points so far this year, MUFG expects the Monetary Board to jack up interest rates by another 100 basis points, including a 50-basis-point increase in August, to bring the benchmark rate to 3.50 percent by the end. of the year.

“With inflationary pressures to rise in the second half, we now anticipate another 100 basis points of rate hikes later this year which would bring the benchmark overnight reverse repo rate to 3.50 percent by year-end,” it said.

The Japanese bank sees the peso ending 2022 at 55.50 to $1 and starting 2023 at 56 to $1 before depreciating further to 56.50 to $1 by the second quarter of next year.

“The peso hit new multi-year lows against the dollar in June and looks to extend its losses in second half on the back of dollar strength, risk aversion as recession fears mount, and widening trade and current account deficits in the Philippines,” it. said.

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