British multinational bank HSBC has raised its Philippine growth forecast to 6.5 percent versus its previous estimate of 5.7 percent, and expects the key central bank interest rate to normalize at four percent by the third quarter in 2023.
HSBC’s chief investment officer for Southeast Asia, James Cheo, in a virtual press briefing on Tuesday, June 7, said the latest growth forecast is still “robust” for the Philippines, although below the government’s own projection of seven percent to eight percent.
The GDP forecast was still high despite the slower global growth momentum and the impact of the “unpredictable” Russia-Ukraine war on global oil, energy and food prices.
As for the Bangko Sentral ng Pilipinas’ (BSP) overnight reverse repurchase (RRP) rate, Cheo said the market – as earlier signalled by BSP – expects another 25 basis points rate hike on June 23, the next Monetary Board policy meeting.
By end-2022, he sees the key rate as climbing to 3.25 percent to temper the rising inflation. The RRP rate is currently at 2.25 percent. For the month of May, inflation increased further to 5.4 percent from 4.9 percent in April.
Next year, HSBC expects the BSP to continue its monetary policy tightening with a gradual 100 bps increase or a four percent policy rate as early as the third quarter.
The inflationary impact will limit result in near term monetary tightening, said Cheo.
“We expect policy rate to increase to 3.25% by end of 2022. Thereafter, we anticipate the policy rate to be increased to 4.00% by Q3 (third quarter) 2023,” he said.
The bank also expect the peso to weaken further to P53.50 by end-2022.
“We see the USD-PHP (US dollar, Philippine peso) drifting higher through the quarters, which is not unusual given Philippines’ current account deficits,” said the analyst. On Tuesday, the peso hit a high of P52.94 from Monday’s close of P52.86.
Cheo said the growth story for the country is still dependent on a high consumer spending, as well as infrastructure and public spending.
He noted that the incoming Marcos administration’s economic policies “are still fluid” but the market will expect continuity when it comes to “broad macro policy such as big infrastructure spending.”
“The good news is that drivers of the Philippine economy are still intact. Both private consumption and investment have been rebounding sharply. Foreign worker remittances have continued to rise, and the government is progressing with the next round of infrastructure projects. We believe that both of these growth drivers will support the Philippine economy to grow by 6.5% in 2022,” said Cheo.
Cheo however added that the local economy has headwinds from the high commodity prices as one of the region’s largest oil and gas importers, as well as a “sizeable” importer of food. “The inflationary impact will limit the recovery in consumer spending and result in a sharper degree of monetary policy tightening,” he added.
HSBC said the global economic cycle will slow down in the second half of the year, while inflation is expected to gradually ease as US rate hike expectations “will be moderating in H2 (second half) 2022, despite lingering energy shock and supply chain disruptions.”
HSBC’s lead economist Fan Cheuk Wan, chief investment officer for Asia, forecasts global GDP growth of 3.4 percent this year, down from the actual 5.8 percent in 2021.
For 2023, global growth will weaken further to 2.9 percent due to “energy shock” and supply chain issues which will increase global inflation to 7.5 percent this year and 5.1 percent in 2023, said Fan during the Tuesday briefing.
Currently, HSBC said it has a “neutral exposure to risk assets with a focus on quality earnings, income strategies and risk diversification” in the next six months with overweight allocation to US, Hong Kong and ASEAN equities.
“We continue to hedge interest rate risk via our overweight position on hedge funds and financials stocks, and we also hedge inflation risk by staying overweight on global energy and materials stocks while investing in private real estate,” said Fan.
She added that HSBC favors high dividend stocks to balance the equity exposure between value and growth. “High dividend stocks are typically value oriented companies in the financials, energy, materials and property sectors. Their value style and lower volatility make them more resilient to interest rate volatility,” she said.
For the Asian markets, as China’s growth trajectory recovers in the second half, HSBC forecasts Asia ex-Japan GDP growth of 4.9 percent this year and 5.3 percent in 2023. Inflation in Asia ex-Japan will be steady at three percent in 2022 and 2.7 percent in 2023.