Swiss-based firm sees Duterte’s infra program lifting growth in 2018


By Rose de la Cruz


Switzerland-based UBS, a global financial provider of business solution and advise, predicts the growth of the Philippine economy being lifted in 2018 by the Duterte administration’s mammoth BuildBuildBuild program.


In a call conference with media, UBS senior economist for ASEAN Edward Teather, said the massive infrastructure program will lift the growth in 2018 despite credit cycle excesses and inflation and the Fed policy tightening to induce rate hikes from Bangko Sentral ng Pilipinas.


The Philippines economy is likely to accelerate into 2018, off the back of rising public investment as the government executes its "build, build, build" program.


Teather said his group projects 6.8 percent year on year (yoy) real Gross Domestic Product growth in 2018, which should slow slightly to 6.5 percent year on year in 2019.


The expansion should be supported by a wider fiscal deficit (3.0 percent of GDP in 2018, after 2.4 percent year to date in 2017) and also by an ambitious tax reform program that raises fuel prices and expands the base for VAT while cutting personal income taxes.


Tax reform and bumper growth are likely to be inflationary for two reasons namely: a) the tax reform package should yield an administrative increase to inflation, which we see as rising to 3.8 percent yoy in 2018, towards the top of BSP's target range, before slowing to 3.4% yoy in 2019 as base effects from tax reform roll out and b) while different measures of the output gap yield varying results (a very small negative output gap under the Hodrick-Prescott filter method, a large positive output gap under a credit-neutral method), our work on looking at investment rates and working-age population growth implies potential real GDP growth in the Philippines likely between 6.0% and 6.5%.


As such, we think a positive output gap is more likely. This lack of economic slack should also put upward pressure on inflation in 2018 as government policy pushes growth above potential.




 Some overheating pressures will be apparent as credit boom continues as the Philippines appears at a different stage in the credit cycle to most of the region.


Credit growth has not yet slowed down, but appears to be yielding diminishing margin returns as real GDP growth and investment have slowed in 2017.


Elsewhere, inflation accelerated to a three-year high of 3.5% yoy in September, driven by a pick-up in core inflation. The current account balance has deteriorated by 4ppts of GDP over the last two years.


While labor data can be unreliable, as the majority of Filipinos are employed outside the formal sector, official data does indicate the labor market may be tight. The unemployment rate (of 5.5% in Q3 2017) remains near all-time lows.


Policy rates

The BSP has highlighted that, while it expects the tax package to temporarily increase inflation by close to 50bps, it doesn't foresee a breach of the upper bound.


Our assessment of the output gap implies a risk that administered packages may have second-round effects. Due to our above-consensus inflation outlook, and the outlook for Fed rate hikes, we foresee 75bps of rate hikes from BSP in 2018, followed by another 50bps in 2019.


These rates hikes should help stem the relative underperformance that the PHP has experienced YTD in 2017. We foresee exchange rate at P54 to $1 at yearend 2018 and 2019.


The Philippines is perhaps more vulnerable to rising US yields than most Asian nations because of the presence of some overheating pressures. The four-quarter moving average of the current account has fallen from close to 4% of GDP in mid-2015 to -0.2% of GDP as of Q2 2017, and has troubled investors.


Rate hikes from BSP should help the Philippines insulate itself against capital outflows – but in the absence of monetary policy tightening, the currency might weaken further in 2019.


Teather is an Executive Director of UBS investment bank's Asian Economics Team, which has been a top ranked team in Asia according to surveys of institutional investors.


His area is India and the ASEAN economies including Indonesia, Malaysia, Singapore, Thailand and the Philippines. He joined UBS in 1998 and worked initially in UBS’ Global Economics Team. For the eight years prior to his current role he was a European Economist based in London, where his responsibilities included coverage of the Euro Area, German, Spanish, Italian and Scandinavian economies. A UK national he has lived in Singapore since 2007 and studied economics at the University of Surrey in the UK and the University of North Texas in the USA.


In this study he was assisted by Alice Fulwood, an economist in UBS investment bank's Asian Economics Team.  She joined the UBS Graduate Training Program in 2012. She was educated at the University of Cambridge where she attained her Bachelors of Arts with Honors majoring in Economics.



UBS provides financial advice and solutions to wealthy, institutional and corporate clients worldwide, as and clients in Switzerland. All of its businesses are capital-efficient and benefit from a strong competitive position in their targeted markets. UBS is present in all major financial centers worldwide. It has offices in 52 countries, with about 34% of its employees working in the Americas, 34% in Switzerland, 18% in the rest of Europe, the Middle East and Africa and 14% in Asia Pacific. UBS Group AG employs approximately 61,000 people around the world. Its shares are listed on the SIX Swiss Exchange and the New York Stock Exchange (NYSE).

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