Philippines economic growth remains above consensus, external risks seems mitigable

Philippines economic growth during the second quarter of this year remained robust, staying above what markets had earlier expected. The impact from the May elections turned out to be way more significant than what was speculated initially.

Philippines Q2 gross domestic product came in robust at 7.0 percent y/y, well above expectations. The economy has grown 6.9 percent in 1H16 alone, driven by a strong expansion across all the domestic components of the GDP. Even if some amount of moderation is factored in 2H16, full-year GDP growth is now likely to come in at 6.6 percent, compared to previous forecast at 6.3 percent, DBS reported.

Further, private consumption grew a record-high 7.3 percent y/y, government consumption expanded 13.5 percent while investment growth came in at 27.2 percent. Import growth would have been robust as well for June (latest data was only up to May) for these figures to be realized.

The sense of optimism continues to linger in the private sector and investing domestically is still the priority for now. Besides, the new government is ready to step up its spending on infrastructure projects. Combined together, all these suggest that any overheating risk is manageable for now.

Indeed, the rebound in loan growth this year has also been indicative of a supportive underlying demand as well as liquidity in the banking system. While another three quarters of 20 percent investment growth is very unlikely going forward, investment growth in excess of 10 percent may be the norm for the next few quarters, the report added.

Meanwhile, the robust pace of growth is encouraging for the Bangko Sentral ng Pilipinas (BSP). The central bank is set to gradually increase the volume of its term deposit facilities, in an effort to drain excess liquidity in the system. Short-term rates are set to gradually move higher, closer towards the current policy rate.