Philippine Q2 GDP growth fastest in five quarters

by Karen Lema, Reuters

Posted at Aug 28 2014 10:04 AM | Updated as of Aug 29 2014 12:01 PM

Balisacan: PH is second fastest growing economy in Asia

MANILA (UPDATE) - The Philippine economy grew at its fastest pace in more than a year in the second quarter even as government spending slowed, strengthening views the central bank will raise interest rates again to curb inflation.

The Southeast Asian economy remains a popular investment destination due to relatively strong economic fundamentals, a stable political environment and improved credit ratings. Standard & Poor's raised the country's long-term credit ratings in May to two notches above investment grade.

After a slow start to the year, the economy grew a seasonally adjusted 1.9 percent against the upwardly revised 1.4 percent in the March quarter, the fastest pace in five quarters.

"The rebound in net exports offset the slowdown in public spending," ANZ said in a research report, adding that it was reiterating its 2014 growth forecast of 6.9 percent on the back of the recovery in manufacturing.

On a year-on-year basis, growth accelerated to 6.4 percent in the second quarter on strong manufacturing and exports. The outcome beat market forecast of 6.2 percent, putting the country on track to meet its full-year GDP target of 6.5-7.5 percent.

Arsenio Balisacan, socioeconomic planning secretary, told reporters that for the economy to hit the low end of the government's target this year, growth should average at least 6.9 percent in the second half. First-half GDP was 6.0 percent.

The latest data bolsters expectations the central bank will follow up on July's rate hike - the first in three years - as early as next month to stay on top of rising prices.

"The strong growth print means that the BSP (Bangko Sentral ng Pilipinas) can focus on taming inflationary pressures. We expect a 25-basis-point hike of both the SDA (special deposit account) and policy rates," said Trinh Nguyen, economist at HSBC in Hong Kong.

Inflation has averaged 4.3 percent in the seven months to July, above the midpoint of the central bank's 3-5 percent goal this year and outside next year's 2-4 percent inflation target. Emilio Neri, lead economist at Bank of the Philippine Islands, said he expects food prices to remain elevated after Manila rejected bids at Wednesday's tender for fresh rice supply.

The consensus from a Reuters quarterly poll in July was for the central bank to raise the main policy rate to 4.0 percent before the end of the year.

The peso rose to its strongest in more than three weeks on expectations of a further rate hike after the GDP data.



Domestic demand continued to be underpinned by remittances from Filipinos working and living abroad, which grew 5.8 percent to $11.4 billion in the first half of the year from a year ago.

That coupled with rising exports and manufacturing makes the

Philippines one of the fastest-growing economies in Asia, matching Malaysia's second-quarter annual growth.

The second quarter has been largely uneven for Southeast Asian economies. While growth in Malaysia accelerated, Singapore and Thailand escaped recession and Indonesia underperformed expectations with growth at its weakest in nearly 5 years.

One bright spot for the Philippines is that exports are gaining momentum, expanding for a fifth straight month in June.

The economy is benefiting from a pick-up in global demand while factories that produce parts in the global tech supply chain are also reaping from launches of new mobile phones and tablets such as from Apple Inc.

Growth in the second quarter was led by the industrial sector which grew 7.8 percent from a year earlier, up from 5.3 percent in the first quarter. Manufacturing was the highest contributor to the industrial sector, climbing 10.8 percent.

But state spending, particularly on construction, fell sharply as the government tightened its hold on expenditure due to allegations President Benigno Aquino's pump-priming programme was tainted with corruption. The government has denied the allegations.

Government expenditure in the second quarter was flat from a year earlier, compared with 12 percent growth in the same period of 2013, official data showed.

Public construction spending fell 12.9 percent in the June quarter against 26.5 percent growth a year earlier, while private construction was almost steady at 12.7 percent growth.

"Government under spending in this quarter is a cause for concern, but we assure that government is aware of this and is taking the right steps to address bottlenecks," Balisacan told reporters, adding there was a "sense of urgency" in Manila's efforts to raise spending in the second half.

But his outlook is not without risks, he said, given the impact later this year of an El Nino dry weather phenomenon on power and farm output.

A policy paralysis that has not moved government plans forward in sectors such as the auto industry, could also cause multinationals to shift production out of the Philippines and hurt future investment, industry executives say.