Compared to its targeted neighbors like China, the Philippines would be relatively unscathed by US President-elect Donald J. Trump's protectionist economic policies, according to the research arm of investment banking giant Deutsche Bank.
However, Deutsche Bank Research economist Junjie Huang said in a report on Monday, Dec. 2, that the Philippines would likely miss its gross domestic product (GDP) growth goal to end this year with 5.8-percent expansion—although better than last year's 5.5-percent growth, no thanks to the string of strong typhoons that battered the country these past few months.
Huang noted that the lower-than-expected third-quarter GDP expansion of 5.2 percent was due to severe weather events towards the end of the third and into the fourth quarters, which caused widespread evacuations, infrastructure damage and agricultural losses— disrupting work and slowing down economic activity.
"While the weaker peso in the fourth quarter could boost remittances and continue to support household spending, we think that this would not be sufficient to tip growth in 2024 to the government's six- to seven-percent target," Huang said, referring to the domestic currency's recent depreciation to 59:$1 levels.
As such, Deutsche Bank Research expects the Philippine government to "step up its fiscal policy to support growth in 2025 to 2026, as the Bangko Sentral ng Pilipinas (BSP), like its peer central banks, may face constraints in its monetary policy easing amid ongoing external pressures, especially on Asia FX [foreign exchange]."
The peso is seen by Deutsche Bank Research ending 2024 at 58.8 against the US dollar, before possibly slightly weakening to 58.9 versus the greenback in the first quarter of 2025 when Trump is back in power.
Deutsche Bank Research likewise sees a bigger budget deficit next year, equivalent to 5.5 percent of GDP, instead of the programmed 5.3 percent, as "we think the government may delay its fiscal consolidation plan, at least in the coming year, not least also given the extensive damage that the adverse weather has had on the country."
This means that the government would likely spend more to recover from the typhoons' economic impact despite the Marcos Jr. administration's intent to narrow the yawning fiscal deficit, partly by tempering public expenditures in lieu of slapping new or higher taxes.
"At the same time, the generally lower inflation rate in the near term would continue to benefit the recovery in real disposable income and household consumption," Deutsche Bank Research added, citing its forecasts of another 25-basis point (bp) interest rate cut on Dec. 19 by the BSP amid "weak domestic activity" and headline inflation expectations staying within the two percent range during the near term.
Deutsche Bank Research forecasted the annual rate of increase in prices of basic goods and services to average 3.1 percent this year and further slow to three percent next year, within the BSP's two- to four-percent target band of manageable price hikes conducive to economic growth.
A boost to government spending plus downward inflation and domestic interest rates "could help to lift 2025 growth to 5.8 percent from our earlier forecast of 5.6 percent, even as the external outlook is likely to remain weak in the coming year," Deutsche Bank Research said. Its upgraded GDP growth forecast for next year, however, remained below the government's more ambitious 6.5- to 7.5-percent goal.
With Trump's return to the White House in early 2025 that may force the US Federal Reserve to slow down its own monetary policy easing cycle, "the BSP may be compelled to pause and prioritize currency defense in its December Monetary Board meeting, and possibly into early-2025, if external pressures are sustained," Deutsche Bank Research said. It forecasted the policy rate to end-2025 at 5.25 percent or just a 50-bp cumulative reduction next year if December's anticipated cut pushes through to 5.75 percent from six percent at present.
Still, Deutsche Bank Research believes the Philippines "may be relatively insulated from the direct impact of a potential tariff war" to be started by Trump against China, Mexico, Canada and other countries.
"An aggressive scenario, which assumes a 60-percent US tariff on Chinese goods and a 10-percent universal tariff from other countries, met with retaliatory measures, has an estimated negative 0.6-percentage point (ppt) cumulative impact on the Philippines' GDP from 2025 to 2028. A more likely scenario could involve 20-percent tariffs on Chinese goods and a five-percent universal tariff, which would imply a more moderate impact," Deutsche Bank Research noted.
But Deutsche Bank Research warned that these developments may further stretch the current-account or net-dollar deficit to 2.7 percent of GDP this year (instead of the earlier forecasted 2.4 percent) and to 2.8 percent of GDP (bigger than the previously projected 2.6 percent) next year.
"The ramp-up in government spending would likely translate to higher capital goods imports, while exports may remain weak on the back of growing trade tensions and an emerging Asian markets exports cycle that may have peaked. The US is also the Philippines' largest export partner, and an imposition of universal tariffs by the former could further weigh on the latter's export outlook," Deutsche Bank Research explained.
While the potentially wider current-account deficit in the next two years would put further depreciation pressure on the peso, Deutsche Bank Research also believes that "Trump's stance against immigration would have limited impact on remittances to the Philippines from the US."
"Although about 40 percent of remittances are from the US, only 9.8 percent of overseas Filipino workers (OFWs) were located in North and South America in 2023. US OFWs would thus be smaller. In comparison, the Middle East accounts for nearly half (46.3 percent) of all OFWs," it pointed out.
Also, "service providers commonly route remittances through correspondent banks in the US, even if the original transaction was not done there," it added, citing the BSP's monthly reports on cash and personal remittances from Filipinos working and living abroad.
To recall, Trump wants to put a halt to illegal migration to the US, where as many as 300,000 Filipinos are staying without proper documents.