Japan-based MUFG Bank Ltd. expects the economy to grow by as much as eight percent this year, exceeding the government target of 6.5 percent to 7.5 percent, boosted by expansion in private consumption and investments.
In a press briefing on Wednesday, Nov. 16, MUFG senior analyst Jeff Ng said a range of 7.5 percent to eight percent gross domestic product (GDP) growth is possible given the strong third quarter data which pushed the latest average to 7.7 percent.
Ng said factors that affected growth such as high inflation, wider current account deficit and the weaker peso will likely normalize next year. MUFG projects GDP to grow by a more modest six percent in 2023. “There will be upside risks to growth next year owing to the strong momentum that we have seen over the past few quarters especially the positive Q3 (third quarter) number,” he told reporters.
He also expects the inflation rate which will remain “higher and sticky” in the next months will average at 5.5 percent this year, which is above the government target of two percent to four percent, but will settle lower at 3.9 percent in 2023.
As for the peso-US dollar rate, MUFG’s latest forecast is that it will end below P58 this year. The Bangko Sentral ng Pilipinas’ (BSP) policy rate hikes which is expected to bring the overnight benchmark rate to five percent on Nov. 17, has stabilized exchange rate pressures.
Ng said they continue to anticipate more policy tightening or at least 75 basis points (bps) this month as has been signalled by the BSP, and another 50 bps rate hike in December. This will bring the BSP end-rate at 5.5 percent by Dec. 17.
“We are currently reviewing our BSP rate forecasts and PHP (Philippine peso) forecasts. Currently we do not expect more BSP rate hikes next year,” said Ng in a separate email to Manila Bulletin.
Ng, who is a currency analyst, also said in email that they are reviewing their previous P61 to the US dollar forecast after the recent US dollar weakness which has allowed “scope for stability around current levels close to P57.”
As to the current account deficit, the MUFG analyst said that with normalization in terms of interest rates and the currency differentials, the current account shortfall is expected to narrow to 4.8 percent of GDP in 2023 from 5.6 percent this year.
“Growth has been supported by domestic drivers, private consumption and investments have been very strong. The base effects wear off, and the numbers will be fairly positive. We continue to expect private sector to remain strong, anchored by domestic spending and supported by remittances as well. For investment growth, (this will be) supported by infrastructure projects,” he said during the briefing.
Beyond 2023, Ng said the local economy is on the upswing and the economic cycle will continue as more economies in Asia recovers.
The main issues for economic growth and inflationary pressures will come off in the coming year such as supply chain issues. These supply pressures will however persist but it will decelerate by 2023.
Ng said another imbalance that will normalize is the US Federal Reserve fund rate outlook. He thinks the US rate will settle at five percent and it will stop here, and this will signal more stability when it reaches this target rate.
As for the strong US dollar and its impact on inflation, Ng said it is more a factor of imported inflation in the case of the Philippines, and this will also ease in 2023 since exchange rate-related pressures “will be less pronounced.”
With more limited room for rate hikes going forward, reversal in foreign exchange movements will allow Asian currencies to gain when it reprices. In this scenario, the peso vis-à-vis the US dollar is due for some positivity, said Ng. As such, the recent softening in the greenback has been favorable to the peso stability.