Philippines Gross Domestic Product expanded by 6.4% year-on-year in Q1, much stronger than expected (Barclays: 3.2%; consensus: 4.3%) and compared with an upwardly revised 4.0% (earlier 3.7%) in Q4 11. Growth was supported by solid consumer spending, a turnaround in exports and increased government spending. On a seasonally adjusted q/q basis, GDP rose 2.5% versus 1.7% in Q4.
Given the strong Q1 GDP print and taking into account increased risks to global growth, we are raising our 2012 GDP growth forecast to 5.5% from 4.2%. After the GDP data were released, Economic Planning Chief Arsenio Balisacan said growth may exceed the government’s 5-6% 2012 growth target, though the government is not yet revising target. He added that infrastructure investment will support growth. The government revised 2011 GDP growth upward to 3.9% from 3.7%. The planning chief Balisacan also said that inflation will be within target of 3.5-5.5%.
Bangko Sentral Governor Tetangco said that the Philippine needs to be mindful of global developments, adding that the BSP will ensure noninflationary growth. We continue to expect the central bank to keep rates unchanged at 4% through 2012, after having cut rates a total of 50bp early in the year. The main risk to our forecast comes from a deteriorating external environment and the implications for global trade. Exports make up roughly 50% of the Philippines’ GDP, mainly electronics (70%) and are largely low-value-added products. The correlation of the country’s GDP to global growth is also the third highest in the region, at about 0.70 (Taiwan and Singapore rank first and second, respectively).
Separately Moody’s changed its outlook on the Philippines’ sovereign credit rating to Positive on 29 May. The foreign-currency rating was maintained at Ba2. The outlook change was driven by continued fiscal and debt consolidation, and the government’s enhanced financing ability. The key triggers for ratings upgrade are: 1) structural improvement in revenue mobilisation; 2) continued reduction in the government debt burden; and 3) acceleration in investment spending, especially the public-private partnership (PPP) programme. S&P rates the sovereign BB (Pos) and Fitch BB+ (Stb). We continue to expect the Philippines to receive a one-notch upgrade in the coming three to six months, catching up with Fitch (see EM Sovereign Credit, 23 April 2012).
Q1 growth details and outlook for GDP components:
- Household consumption grew by 6.6% y/y compared with 6.4% earlier. Spending was supported by a 5.4% rise in remittances in Q1, relatively contained inflation and a supportive equity market. Our sense is that consumption growth will slow a bit in Q2, given increased global concerns and also weaker equity markets.
- Government consumption accelerated sharply, rising 24% y/y – more than three times the Q4 pace – owing to a low base and a rise in materials procurement for capital projects. At the same time the government has increased disbursal on a number of social protection programmes. We expect growth in government consumption to average 13% in 2012 up from 1% last year.
- Investment in the economy grew 2.8% y/y versus a contraction of 0.3% in Q4. Public construction rose by 62%, and although the increase was boosted by low base, the government has also accelerated release of funds for capex projects. Private construction, in comparison, grew roughly 10% y/y. Durable equipment investment rose 3.6%, compared with an 8% decline at the end of last year. Our base case remains that investment will rise 5.4% in 2012 compared with 2.3% last year, driven by increased disbursals for capex projects and a pick-up in the pace PPP outlays, as well as continued private sector investment.
- Net exports contributed 5.2pp to growth, after subtracting from growth for two consecutive quarters (0.3pp in Q4 and 6.2pp in Q3). Exports grew 8%, reversing a similar-sized contraction in Q4; the turnaround was driven by goods exports. Services-related exports (business process outsourcing) remain robust. Imports contracted 2.6%, an improvement from the 6.2% fall in Q4 and consistent with the rebound in goods exports. Although the turnaround in global electronics indicators (eg, semi-conductor book-to-bill ratio) are supportive, slowing global growth momentum suggests risks to Philippine exports are rising.