UBS Asian Economic Comment - Philippines: Showing resilience?

Summary
- The Philippines economy surprised positively in the final quarter of2008, growing 4.5% on the year and 1% on the quarter. Although wellbelow the trend of the last few years, this is a favourable outcome inthe face of a likely outright contraction in the global economy.
- We maintain our 1.8% real GDP growth forecast for 2009. Indeed, claimsof resilience for the economy in aggregate must be tempered by evidencewithin the detail of the national accounts. The 5% on the year Q4expansion in industrial output, for example, will be hard to sustain inthe context of a 7.5% decline in total exports and a 7.4% decline incapital investment (ex-construction and agriculture). Of note, whilethese latter figures do gel with developments elsewhere in the regionand trade data, the latest national accounts data (headline andcomponents) may be subject to revision given the large statisticaldiscrepancy reported in Q4.
- Nonetheless, consumption spending and government expenditure areshowing some resilience, growing 4.5% and 4.7% on the year respectivelyin Q4. And construction investment activity also grew strongly at 11.6%on the year. The concern relating to both residential construction andconsumption remains income (employment) growth in the Philippines andthe flow of remittance income from overseas workers. Layoffs arebecoming widespread regionally and we expect a decline in US dollarremittances during 2009. Even so, we expect real consumption growth ofaround 3% in 2009 to outperform GDP because of historic relativestability and much lower inflation during 2009 as food and energy pricesmoderate relative to 2008.
- The fact is that Q4 real GDP growth in the Philippines surprised onthe upside by growing 4.5% against a Bloomberg consensus centred on 3.5%and a government projection of 3.6-4.4%. With upside activity surprisesnot so common at present, this has to be taken positively. However, thepotential for economic weakness is still clear. We continue to expectreal GDP growth to slip below 2.0% in 2009 as highlighted in SoutheastAsian Focus: Philippines - reality check; Ed Teather; 17 November 2008.In other words, a further sharp slowdown in activity is still on thecards (witness the 32% decline in USD imports in November).
- Thus, despite Q4 resilience, we expect and believe the authoritiesshould continue to meaningfully ease both monetary and fiscal policy. Welook for policy rates to fall to at least 4.5% and for the fiscaldeficit to surpass 1.5% of GDP in 2009. The BSP's decision to lowerpolicy rates 50bps today as expected while stating that there is "roomfor further easing" is in line with this forecast.
Chart 1: Philippines real GDP forecastSource: UBS Estimates, NEDB
Chart 2: Real investment, exports and consumptionSource: UBS Estimates, NEDB
Table 1: Philippines GDP expenditure breakdown - historic data and UBSforecastsSource: NEDB, UBS Estimates

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