Philippines Business Forecast Report Q3 2013 - New Report Available

Following a blowout 6.6% performance in 2012, we forecast the Philippine economy to expand by 5.5% in 2013. We envisage a strong comeback in fixed capital growth in 2013, and believe that this will mark the beginning of a longer-term resurgence in investment.

Inflation ended 2012 at a benign 2.9%, but we retain our end-2013 inflation forecast of 4.0%. Price pressure is expected to rise gradually as a result of strong economic activity and loan growth on the back of easy monetary policy. At the same time, we do not expect the Bangko Sentral ng Pilipinas (BSP) to raise its benchmark interest rate before the end of 2013. We currently expect the central bank's benchmark interest rate to end 2013 at its current 3.50%, but we note that BSP will likely pursue further macroprudential measures in an effort to discourage potentially destabilising levels of hot money inflows.

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Despite the fact that the Philippines has passed another expansionary budget for 2013, we expect the budget deficit to widen to come in at a manageable 2.2% of GDP in 2013. While spending continues to be limited by administrative difficulties, revenue growth will be supported by the government's increasing tax collection efficacy and the introduction of a wide-ranging sin tax.

As we expected, the Philippines has finally achieved an investment grade rating from a major credit ratings agency, reflecting the country's improved growth outlook and the government's increasingly consolidated fiscal position. We expect that further upgrades from the remaining agencies are likely in the cards.

Major Forecast Changes

In line with our view, fixed capital formation continued to surge in Q412, expanding by 10.6% year-on-year (y-o-y) on the back of the country's ongoing construction boom. Looking ahead, we expect the Philippine economy to continue to outperform as a result of a robust investment environment as well as the country's increasingly healthy domestic consumer, and have upgraded our 2013 growth forecast to 5.5% from 5.0% previously.

Key Risks To Outlook Risks to our 2013 growth forecast are to the upside; exports could continue to outperform despite continued weakness in external demand. Risks to our peso outlook are likewise to the upside, as the currency could continue to outperform in the event that hot money outflows hold up for a longer-than-expected period.

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