Nomura maintains 6.7% PH growth forecast

NOMURA, a Japanese investment bank, kept its economic growth outlook for the Philippines this year that is below the government’s target, citing concerns on the external environment.

“We maintain our 2022 GDP (gross domestic product) growth forecast of 6.7 percent, which is below the government’s range of 7 to 8 percent (narrowed from 7 to 9 percent) and reflects our more cautious view on the external environment…,” Nomura research analysts Euben Paracuelles and Rangga Cipta said in a report titled “Between a rock and a hard place” released on Friday.

Despite their growth estimate being higher than the 5.7-percent actual GDP expansion for 2021, they cited the ongoing conflict in Ukraine as one of the reasons for their cautious forecast, as well as rising local prices, which they believe may reduce consumer sentiment.

The country’s inflation rate surged to 5.4 percent in May, the highest in three years, raising the year-to-date average to 4.1 percent, well beyond the government’s 2- to 4-percent target for the year.

Nomura, for one, raised its inflation projection for 2022 to 5.1 percent from 4.6 percent, citing rising food and fuel prices.

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“We also now see core inflation picking up, given the economic reopening and some signs of second-round effects, as well as wage increases,” its analysts added.

They also said that the selection of Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno as the next Finance secretary and Monetary Board member Felipe Medalla as the next central bank chief means that policy normalization, which began in May, will continue.

The policymaking Monetary Board increased the BSP’s overnight borrowing, lending and deposit rates by 25 basis points to 2.25 percent, 1.75 percent and 2.75 percent, respectively, effective last May 20.

“Medalla already hinted at rate hikes in June and August, which would take the policy rate to 2.75 percent, in line with our forecasts. However, given the trajectory of our inflation forecasts, we expect the policy rate to end the year at 3 percent before rising to 3.5 percent by Q1 (first quarter) 2023,” the Nomura analysts added.

If the next government pursues a course of greater fiscal activism and pushes a more pro-growth policy mix, Paracuelles and Cipta said they believe the terminal rate might be lower than their projection of 3.5 percent.

In terms of fiscal policy, the Nomura analysts said they expect a budget deficit of 6.9 percent of GDP this year, which is narrower than the government’s forecast of 7.5 percent, down from 8.6 percent in 2021, thanks in part to the Supreme Court’s Mandanas-Garcia ruling, which increases fiscal transfers to local governments by a massive 38 percent.

“This not only runs the risk of underspending, as local governments have weak absorptive capacity, but also leaves less flexibility for the central government to deploy resources,” Paracuelles and Cipta warned, adding that given President-elect Ferdinand Marcos Jr.’s campaign promises to lower energy and rice prices and provide tax relief to small and medium businesses, they see a risk of increased subsidy spending.

The analysts said they still expect an increased risk of a credit rating downgrade for the Philippines in the coming months, owing to an uncertain medium-term fiscal consolidation path, as Fitch Ratings retained its negative outlook in February this year.

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