Philippine economy to grow faster leading into 2015 amid fears of contagion from Russian economy

Cebu, PHILIPPINES, Dec 22, 2014 – Arsenio M. Balisacan, Director-General of the National Economic and Development Authority (NEDA), at a year end briefing, was bullish about the end of year prospects of the Philippine economy, citing resilient strong macro-economic fundamentals, a sentiment that has been previously echoed by numerous ratings agencies and the World Bank.

However, weak public spending, particularly in export infrastructure (which has squeezed export growth) has led to HSBC and Maybank projecting 5.9% full-year GDP growth, while the Asian Development Bank (ADB) dropped its 2014 performance forecast for the Philippines by 0.2 percentage points to 6%.

Business sentiment has remained upbeat, and the country’s exports and industrial sector are out performing projections, with exports set to grow by 10% this year (up from 8% projected), and the industrial and manufacturing sector outperforming all other major sectors within the economy.

Domestic consumption also remains strong, as concerted government action led to the avoidance of a price spike in essential goods following damage to the agricultural sector as a result of the recent typhoon.

A better than expected budget position (leading to the recent Moody’s ratings upgrade) also means that the Philippines has become more capable of resisting any contagion effect that might arise out of the worsening situation in Russia.

The record breaking fall in the Russian ruble due to rapidly declining commodity prices (the Russian government is highly reliant on royalties from oil production), and exacerbated by sanctions arising out of the Ukraine affair, weighed on Asian currencies and stock markets last week.

The Indian rupee slid to a 13-month low, and Indonesia’s rupiah required central bank intervention after falling to a 16-year low. Brent crude is now at USD58.60, a five year low, due to a glut in supply (the explosion in shale oil has turned the US into a net exporter, and OPEC failed to agree to cut production earlier this year due to geopolitical issues), weak demand (due in large part to falling demand from China), and competing energy sources (particularly Gas). Exchange data from Bloomberg showed that USD3 billion was taken out of stock markets in South Korea, Taiwan and India last week due to concerns of contagion.

Sean Yokota, the Singapore-based head of Asian strategy at Skandinaviska Enskilda Banken AB noted that in emerging markets “Risk appetite is declining as oil prices are moving lower.”

However, as a net importer of oil, the rapidly falling price could also provide an uplift to the Philippine economy, with the price of electricity already falling (Meralco pushed through another rate reduction on December 18).

HSBC has a muted outlook on the Philippine’s economy for 2015, projecting 6.1% growth, a little under half a percent under the growth target of the Philippine Government. Maybank on the other hand, despite also downgrading growth projections, is slightly more bullish, with the expectation of a bounce back year in 2015 with 7% growth. ADB expects 6.7% growth in 2015.

Li & Hungerford projects growth in 2015 to be in line with Maybank projections at 6.8-7.0%, as the Philippines strong macroeconomic fundamentals and improved debt profile insulates it from any minor effect the Russian economy might have (Russia is not a major trading partner, although there was a recent sharp increase in demand for OFWs, this is expected to abate). The Philippine stock exchange has been a leading performer within the region (21% growth in 2014), and this is likely to remain the same, as business sentiment and consumer demand continue to grow. Provided the price of oil remains depressed, growth may reach the higher end of our 2015 projection.

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