Philippine Q4 GDP surprises, strong peso causes anxiety

by Karen Lema, Reuters

Posted at Jan 31 2013 11:35 AM | Updated as of Jan 31 2013 09:20 PM

MANILA (UPDATE) - The Philippine economy grew faster than expected in the last quarter of 2012 on robust domestic demand, bolstering expectations that the country's key policy interest rate will stay at a record low in the early part of the year.  

The central bank said that strong economic growth supported the view the domestic economy needed "very little support" via monetary policy to sustain its momentum.

But Manila is concerned about the impact of a strong peso, particularly on the competitiveness of its exports and the growing outsourcing sector, as well as on remittances of overseas Filipinos that fuel domestic consumption. 

Gross domestic product rose 1.5 percent in the December quarter from the previous three months, compared with a market forecast of 0.6 percent and after revised 1.7 growth in the third quarter. 

Increases in private and public spending helped offset sluggish demand for exports, keeping the Philippines, like many of its neighbors in Southeast Asia, resilient in 2012 despite global headwinds. 

"It is our immediate task to put in place policies and implement programs that will sustain our economy's growth over the medium term," Arsenio Balisacan, economic planning secretary, told reporters. The government will continue to work on transforming the economy to one that is more industry and investment driven, he added.  

Balisacan also said economic managers were discussing ways to address the impact of a strong peso on the economy. But he said there was no need to resort to drastic measures such as capital controls with the absence of major currency swings. 

The peso has risen more than 1 percent against the dollar so far this year after surging nearly 7 percent in 2012.  

From a year earlier, the economy rose a faster-than-expected 6.8 percent and against revised 7.2 percent annual growth in the September quarter, the economic planning agency said. 

For the full year 2012, the economy grew 6.6 percent, surpassing the government's 5-6 percent forecast and market expectations of 6.4 percent. After China, the Philippines has reported the fastest growth in 2012 so far.  

Government expenditure jumped nearly 12 percent in 2012 while private spending, boosted by remittances from Filipinos working overseas, was up 6.1 percent. 

MOMENTUM TO SUSTAIN     

The government expects the Philippines' growth momentum to be sustained this year as the government pursues investment in infrastructure through public-private partnerships.  

"The pace of Philippine growth has consistently surprised on the upside in the past year as the economy displays resilience against global headwinds and driven primarily by domestic  engines," said Radhika Rao, economist at Forecast PTE in Singapore.  

"However, one cannot downplay the need for domestic investments, public and private sector, to translate the cyclical upturn into a more structural-driven recovery," she said. 

Robust growth may push up inflation later, although any rate increase will not come soon because of strong capital inflows, said Enrico Tanuwidjaja, economist at RBS in Singapore. 

Diwa Guinigundo, central bank deputy governor, said the economy was beginning to show dividends from various policies put in place. That includes rate cuts totaling one percentage point last year. 

The International Monetary Fund has raised its 2013 economic growth forecast for the Philippines to 6 percent, and it expects the economy to grow at a healthy pace of 5.5 percent in 2014.

With the positive growth outlook, the majority of economists in a Reuters quarterly poll released this month expect the central bank to keep interest rates steady until the third quarter of the year.  

Economists in the same poll estimate 2013 growth will slow to 5.6 percent. While the forecast is below the government's 6 to 7 percent target this year, it is higher than the growth estimates for Malaysia, Thailand, Vietnam and Singapore. 

The central bank has trimmed its forecast for average inflation in 2013 to 3.0 percent from 3.1 percent but raised its 2014 forecast to 3.2 percent from 2.9 percent.