Philippines inflation likely to remain at bay further this year, supporting private consumption: DBS Group Research

Philippines’ inflation is expected to remain at bay further this year, supporting private consumption, having stabilized from the peak in September-October to 1.7 percent in August this year, according to the latest report from DBS Group Research.

Soft domestic demand and high base effect from last year are likely to keep inflation around 2 percent until YE19. There are several risks to this outlook.

First, the government plan to increase the anti-dumping duties on rice planned for October might inflationary but is unlikely to push inflation above 2.2 percent for the rest of the years (rice weight in CPI is 9.6 percent).

Moreover, the substitution effect between pork and other types of protein should soften the impact to overall CPI. External headwinds to trade have caused growth to slow. Growth disappointed in 2Q recording 5.5 percent from consensus estimate of 5.9 percent, the weakest in 17 quarters, the report added.

Budget impasse earlier this year was the main cause of the growth slowdown alongside with higher global headwinds. In addition to the backloading of expenditure due to budget impasse, overall government infrastructure spending this year was cut by PHP95.3 billion.

This will negatively impact growth given that government infrastructure was the main driver of growth in the last three years. Moreover, despite significantly lower inflation this year, consumption has slowed in Q2. This slow down tallies with retail 1H earning results which recorded a double-digit contraction. Industrial production growth is still in negative territory.

"On a positive note, we think that growth might rebound in H2 although it is unlikely to rise above 6 percent," DBS further commented in the report.

Image Courtesy: DBS Group Research