MANILA - Nomura, a leading financial services group, said the Philippines is poised to be the strongest-performing Southeast Asian economy, expecting gross domestic product (GDP) growth to accelerate to 6.8 percent next year, from 6.7 percent this year.
Nomura’s Asia Special Report, titled “Asean on the Move,” says the economies of Malaysia and the Philippines are in the best shape. Thailand and Indonesia are likely to struggle, with Singapore in the middle.
“However, between the Philippines and Malaysia, our preference is for the former, given the lower fiscal drag and, thus, stronger growth prospects,” it said.
Nomura said the Philippines offers a good example of the positive effects of fiscal reforms on growth.
“As we have argued before, a decline in fiscal spending can hurt growth initially but, in the more medium term, fiscal reforms are likely to lead to improvements in the quantity and quality of public expenditures, and the crowding-in of private investment,” Nomura said.
“This has largely played out in the Philippines, with reforms pushing interest rates structurally lower and boosting business sentiment, helped by credit-rating upgrades and resultant higher contributions from investment spending to GDP growth,” Nomura added.
Nomura Global Economics forecasts Philippines economic growth to hit 6.7 percent this year and 6.8 percent next year, better than Malaysia’s GDP of 5.4 percent in 2014 and 4.3 percent in 2015.
Indonesia’s GDP growth is forecast at 5.3 percent and 5.8 percent for 2014 and 2015, respectively, while Singapore is expected to grow 4 percent and slow down next year with a 2.9-percent GDP growth.
The GDP growth of the Asean 5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand) is seen at 4.8 percent and 4.9 percent, while global economic growth is at 3.3 percent and 3.6 percent for 2014 and 2015, respectively.
“There are growing divergences and this is reflected in our monetary policy outlook. We expect over the balance of this year policy rate hikes in the Philippines by 100 basis points starting in the third quarter,” it said.
“Our view remains that peso appreciation will help Bangko Sentral’s monetary tightening bias through lower import prices, but also by reducing domestic demand due to a fall in the peso value of remittances,” it said.
Foreign-exchange reserve data this year also suggest that the BSP’s preference is against peso depreciation, with relatively active American dollar selling—with an average monthly fall of $1.2 billion from January to April, compared to an average of $0.3 billion of monthly buying in the previous six months.
“We view these steps as important in stabilizing net foreign selling of local government bonds, which totaled $2.2 billion from January to March, or around 18 percent of total foreign ownership,” it added.
Exhibiting one of the greatest economic comeback stories, the Philippines also consistently ranks among the top in a variety of country rankings carried out by Nomura in the last 12 months regarding structural soundness in the region. This was further underscored by the recent Standard & Poor’s upgrade.
From a regional perspective, Nomura is neutral on the Philippines and sees long-term potential in the market with lots of scope to absorb foreign direct investment and grow the manufacturing and business-process outsourcing alongside favorable demographics; increased penetration in financial, telecom, consumer services; and encouraging local investment in infrastructure.