Foreign banks cut growth prospects as RP lenders remain hopeful

MANILA, Philippines - Just one day after Manila raised the possibility of a recession – defined as two consecutive quarters of economic decline – financial institutions have taken their respective cues, releasing forecasts both positive and pessimistic. Foreign banks, local lenders, and a New-York-based think-tank have expressed mixed sentiments about the prospects of the Philippine economy. The Development Bank of Singapore (DBS) reduced its Philippine growth forecast this year after what it described as “disappointing" 0.4 percent growth in the first quarter. On Thursday, the National Statistical Coordination Board said that economic managers would be confronted with a recession as seasonally adjusted gross domestic product (GDP) fell by 2.3 percent, the lowest for the past 20 years. During the first quarter, the economy inched up by just 0.4 percent buoyed by construction, agriculture, transportation, communication and storage, mining and quarrying and private services. As prices continue to go up, consumer spending was just 0.8 percent from 5.1 percent a year ago. Meanwhile, New York-based think tank Global Source may consider downscaling its full-year growth forecast for the Philippines, which was even lower than government assumptions of 3.1 percent to 4.1 percent. In a research note, DBS said the economy, as measured by its GDP, or the value of goods and services produced within the country, would marginally grow by 0.5 percent for the whole year. Its estimate is lower than its previous expectation of a 2.5 percent expansion for this year. The Singapore-based lender – reportedly Asia’s biggest – expressed near certainty that Manila will “downgrade its GDP forecast and hike its budget deficit estimate since slower growth necessarily means lower revenue collections." Reduced business activity lowers the traffic of goods and services, thereby cutting the volume of transactions that government can tax. Moreover, for government to meet its full-year growth goals, “would require the economy to sustain sequential expansion of some three percent quarter-on-quarter seasonally adjusted for the remaining three quarters – an implausible scenario," DBS said. To help the Philippine economy expand, DBS expects the Monetary Board to cut interest rates by another 25 basis points at its monthly meeting. A rate cut makes loans cheaper. Besides encouraging banks to lend, a rate reduction also prompts businesses to borrow, especially for their expansion, which in turn, leads to more employment. Although DBS ruled out a recession for the Philippines, it nevertheless will keep an eye on consumer spending indicators in the coming months. Remittances are seen to come under pressure, possibly curtailing consumer spending which help boost growth, the bank said. “Mitigating factors such as lower interest rates, a materialization of planned fiscal expansion, and perhaps even a recovery in domestic asset markets could keep consumer spending supported, albeit at subtrend rates," it said. Meanwhile, as with the other economies in the region, the Philippines should also start to see external demand leveling out, if not improving. These factors combined should keep overall GDP from contracting further in the coming quarters," DBS said. Next: Slower consumer spending bodes ill for govt revenues Slower consumer spending bodes ill for govt revenues For its part, GlobalSource said that the 2.5 percent economic growth it estimated early this year “no longer appears to be viable." The think thank is “inclined to undertake downward revisions" in its subsequent Philippine forecasts, citing slower consumer spending which comprises 80 percent of the economy. While it recognized that public spending “modestly picked up" during the first quarter, “slow growth by itself bodes badly for fiscal deficit numbers given the effect on revenues," they said. “The slowdown in growth also adds stress to an already weakened debt-to-GDP ratio [a measure of the country’s ability to pay its debts]." “[Leading economic indicators pointed to continued weakness] calls for greater support from both monetary and fiscal policy, though monetary and fiscal management now clearly more difficult with the policy mix requiring careful evaluation," they said. GlobalSource sees "yields rising as the benign inflation outlook allows monetary policy to support the short end as well as the belly of the curve while growing fiscal difficulties put pressure on the long end." In separate interviews, Sy-led Banco De Oro Unibank Inc. and Aboitiz-led Union Bank of the Philippines remain optimistic about the economy. "We are looking at a snapshot. Statistics tend to be volatile. But generally, we may expect some slowdown. It is early to say [there will be slowdown in loans]. It is still strong on a comparable basis," BDO president Nestor V. Tan said. For his part, UnionBank president and chief operating officer Victor Valdepeñas expects “better numbers" for the second quarter. At the Philippine Stock Exchange, the bellwether PSE index closed stronger near its intra-day high of 2,398.25. It gained 1.48 percent to finish at 2,389.31. Jose L. Vistan, AB Capital Securities Inc. research senior manager, said the PSEi is "now making higher highs and higher lows" and had been overbought since May 5. He believed there seems to be a mismatch in terms of fundamentals and technicals. "With all the negative backdrop, it’s astonishing to see how the stock market has managed to hold up," Vistan said. “The PSEi is slowly but surely drifting away from the important one year moving average, a bullish technical sign." Similarly, the said average is going up, he said. “The market seems to be sentiment driven and the high level of positive emotion has caused investors to shun all the bad news on the economy and corporate earnings," he added. - GMANews.TV