A combination of global headwinds and the hawkish policy rate hikes of the Bangko Sentral ng Pilipinas would cause growth to slow next year to 5.5 percent before improving to 6.2 percent in 2024.
Fitch Ratings on Thursday said the country’s economy would grow only at 5.5 percent in 2023 following a growth of 6.8 percent this year, before it recovers to 6.2 percent in 2024.
The slower growth was traced to global headwinds and the aggressive policy rate hikes of the Bangko Sentral ng Pilipinas, which are designed to match those of the hikes imposed by the US Federal Reserve.
Fitch said these were also the reasons for its decision to maintain the “BBB” with a negative outlook Long Term Foreign Currency Issuer Default Rating on the Philippines.
“The Negative Outlook reflects risks to the Philippines’ medium-term growth prospects, fiscal adjustment path and external buffers in an environment of higher interest rates, weaker external demand and higher commodity prices,” Fitch Ratings said.
“The “BBB” rating balances strong growth, external finances and a credible economic policy framework against lagging structural indicators, including per capita income and governance, relative to peers,” Business Mirror reported.
Global growth to slow 1.7% in 2023
Fitch said its global growth forecast is expected to slow to 1.7 percent in 2023 and 2.8 percent in 2024, which could also affect the growth of the Philippine economy.
The credit watcher said the BSP may also raise policy rates beyond Fitch’s expectations to 5.25 percent. On Tuesday, Central Bank Governor Felipe M. Medalla said the Monetary Board could raise interest rates by another 100 basis points this year.
In September, the BSP hiked its rates for the third consecutive month by 50 basis points to 4.25 percent. The Monetary Board has a policy rate setting slated for November 17.
“The central bank has been focused on the second-round effects of imported inflation and exchange-rate depreciation and has so far hiked its policy rate by 225 bp in 2022 to 4.25 percent, including an out-of-cycle increase of 75 bp in July,” Fitch said.
“We think its inflation-targeting framework remains credible and we expect rates to rise further, potentially beyond our assumption of 5.25 percent by end-2022, if domestic inflationary pressure continues to build,” it added.
Inflation to average 5.5%
Fitch expects inflation to average 5.5 percent in 2022, fueled by higher commodity prices and currency depreciation. The moderation of these factors could slow inflation to 3.5 percent in 2024.
Fitch said the medium-term inflation outlook is subject to considerable risk, with September consumer prices up 6.9 percent year on year, above the central bank’s 4-percent target, and core inflation up 4.5 percent annually.
Services inflation, Fitch said, has remained more muted and household inflation expectations are only just above 4 percent.
However, Fitch expects interventions in the foreign-exchange market to support the Philippine peso will be limited. The government has now repaid all the P540 billion or over 2 percent of GDP in advances that the central bank made to it in 2020.
It said BSP’s holdings of government securities remained above pre-pandemic levels at P1.5 trillion in September.
“The government’s response to the commodity price shock has been measured, and it has resisted calls to impose blanket fuel subsidies,” Fitch noted.
Fitch said it expects the general government (GG) deficit to narrow to 4.3 percent of GDP in 2022 and 2.4 percent of GDP by 2024, from 4.8 percent of GDP in 2021.
This, Fitch said, is consistent with a narrowing of the budgetary central government (CG) deficit to 8 percent of GDP in 2022 and 6.3 percent of GDP by 2024, from 8.7 percent of GDP in 2021.
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