Following 2011s disappointing GDP growth of 3.7%, we estimate that the Philippine economy will bounce back with slightly stronger growth of 4.2% in 2012. Weak external demand as a result of a developing hard landing in China and the continued malaise in the eurozone and Japan will continue to weigh on exports, which we estimate will grow only 2.2% in 2012. Following Bangko Sentral ng Pilipinas two rate cuts totalling 50 basis points in Q112 (matching our target), we continue to expect the central bank to keep rates on hold through the rest of 2012, as inflation, which remained modest at 2.8% in June, will rise only incrementally to 3.4% by the end of the year.
The Philippines fiscal position continues to improve. We expect the budget deficit to widen to just 2.2% of GDP in 2012, compared with the governments projection of 2.6%, as spending continues to be limited by administrative difficulties. While its improving fiscal dynamics led to a credit rating upgrade from Standard & Poors in July, we note that the Philippines low GDP per capita and relatively high debt-to-GDP ratio will most likely prevent it from acceding to investment grade until at least late 2013.
Major Forecast Changes
Following stronger-than-expected Q112 growth of 6.4% year-on-year (y-o-y), we have upgraded the Philippines full-year GDP growth forecast from 3.9% to 4.2%. That said, we still expect the economy to slow in the second half of the year as poor external conditions clash with a relatively health domestic economy.
Key Risks To Outlook
A third round of quantitative easing from the US Federal Reserve remains a possibility. This, or a material improvement in the global economy, could see the Philippine peso outperform our bearish end-of-2012 forecast of PHP46.00/US$.
Table of Contents
Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
US Ties Boosted As China Territorial Rows Simmer
The Philippines détente with China following the most recent territorial row is likely to be fleeting, and we expect Philippine-US relations
to be boosted further as Manila continues to find little consensus support among its Association of Southeast Asian Nations peers
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Prospects For Improving Governance
The Philippines faces a number of political challenges over the coming years that, if handled successfully, could improve governance
However, given low income levels and high levels of inequality, we expect the political scene to remain vulnerable to intermittent
instances of turmoil
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Insulated From Regional Risks
The Philippine economy expanded by 6 4% y-o-y in Q112, beating expectations with strong services growth of 8 5% amid an improving
domestic outlook Although external headwinds are expected to persist, dragging on exports over coming quarters, we have revised
upwards our full-year 2012 private consumption growth outlook to 5 0% from 4 3% as a result of the services sectors stronger-thanexpected
performance in Q112, bringing our full-year headline GDP forecast for 2012 from 3 9% previously to 4 2%
TABLE: ECONOMIC ACTIVITY
Fiscal Policy
May Budget Deficit No Threat To Full-Year Outlook
The Philippines continues to exhibit improving fiscal dynamics, with total government debt falling amid a manageable budget deficit and
increasing revenues Although the governments monthly fiscal deficit rose to PHP19 9bn in May (the highest mark so far in 2012), the
January-May deficit was well within the governments target range, and we maintain our forecast for the full-year deficit to come in at just
2 2% of GDP versus the governments forecast of 2 6%
TABLE: FISCAL POLICY
Monetary Policy
Monetary Sweet Spot For BSP
Bangko Sentral ng Pilipinas has hit a monetary sweet spot, with its benchmark interest rate at a record low amid mild inflation that is
unlikely to rise materially over the remainder of 2012 As such, we continue to expect the central bank to maintain its benchmark rate at
4 00%, and see inflation rising only slightly to 3 4% by the end of 2012 from 2 9% in May as moderating commodity prices help to offset
stronger credit and money supply growth domestically
TABLE: MONETARY POLICY
Balance Of Payments
Hot Money Inflows Signal Growing Risk
We continue to expect the Philippines current account surplus to slowly narrow as a growing trade deficit begins to outweigh the
positive effects of the countrys uniquely strong remittances We expect the surplus to fall to US$4 3bn in 2012 versus US$5 9bn in
as Q112s modest export growth will not last in view of a poor demand outlook among the Philippines largest trading partners
TABLE: CURRENT ACCOUNT
Chapter 3: 10-Year Forecast
The Philippine Economy To 2021
Uncovering A Forgotten Gem?
The Philippines holds significant economic growth potential and may come into the investment spotlight within the next few years
Although the country is currently hampered by political instability and poor investor perception, we believe President Benigno Aquino III
will be able to make progress on both fronts Moreover, consumerism is expected to pick up in a big way towards the end of the decade
as income levels rise
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
Institutions
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
TABLE: BMI LEGAL FRAMEWORK RATING
TABLE: LABOUR FORCE QUALITY
Infrastructure
TABLE: ASIA, ANNUAL FDI INFLOWS
TABLE: TRADE AND INVESTMENT RATINGS
Market Orientation
TABLE: TOP EXPORT DESTINATIONS
Operational Risk
Chapter 5: Key Sectors
Pharmaceuticals
TABLE: PHARMACEUTICAL SALES, 2008-2016
TABLE: PRESCRIPTION DRUG SALES, 2008-2016
TABLE: PATENTED DRUG SALES, 2008-2016
TABLE: OTC MEDICINE SALES, 2008-2016
Telecommunications
TABLE: GENERIC DRUG SALES, 2008-2016
TABLE: FIXED LINE – HISTORICAL DATA AND FORECASTS
TABLE: INTERNET – HISTORICAL DATA AND FORECASTS
TABLE: MOBILE – HISTORICAL DATA AND FORECASTS
TABLE: ARPU (PHP) – HISTORICAL DATA AND FORECASTS
Other Key Sectors
TABLE: AUTOS SECTOR KEY INDICATORS
TABLE: FOOD & DRINK SECTOR KEY INDICATORS
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS
TABLE: FREIGHT KEY INDICATORS
TABLE: OIL & GAS SECTOR KEY INDICATORS
TABLE: DEFENCE & SECURITY SECTOR KEY INDICATORS
Chapter 6: BMI Global Assumptions
Global Outlook
The Cycle Has Turned
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 47
