Updated: December 16, 2022
BPI lead economist Jun Neri shares his insights on the Philippine market. What happened in 2022 and what we can expect in 2023?
Why did the PHL economy beat growth and employment expectations in 2022?
- Rapid real gross value added (GVA) growth of the sectors that lagged during the pandemic were in the area of 20% (Construction) to 60% (Arts & Entertainment) vs the average growth rate of 7.6% of the entire economy.
- Election-related spending in 1H2022 combined with the resumption of face-to-face classes as well as more relaxed protocols for transport and travel in 3Q2022 led to a significant uptick in demand for high-contact activities like restaurants & hotel accommodations, food services, movie theaters traffic, tourism activities, etc.
Why didn’t the PHL economy see a sharp decline in demand despite the rise in domestic interest rates?
- Consumers and MSMEs were compelled to take on more debt in order to cope with the children’s needs for the reopening of face-to-face classes.
- Banks, at the same time, were more willing to provide additional personal loans and issued more credit cards to applicants as the recovery of the business opportunities & employment made it safer to do so. In other words, overall credit risk declined when the economy managed to reopen. Most banks didn’t even raise the borrowing rate on such loans.
- Big corporate accounts were the ones that felt the effect of higher interest rates. However, since many of them took advantage of the low-interest rate environment in 2020 and 2021, they are still able to manage the cost of debt servicing.
What are the most crucial external factors that will affect the PHL economy’s performance in 2023?
- BPI’s external adviser TAC economics believes that the tensions in Eastern Europe will ease in 2023 as the hard winter from Dec to Feb will likely bring both parties to the negotiation table. TAC expects both sides to dial back their sanctions and is likely to come up with a peace agreement.
- US inflation is not expected to fall below 4% immediately which would mean the Federal Reserve is expected to continue hiking through the middle of next year before they pause in response to a confirmed recession. Since inflation will be well above its 2% target, the FOMC will likely be forced to cut rates later partially in 2023 to avoid an even deeper economic downturn.
- Meanwhile slower economic growth (possibly even a recession) in Europe and US and below-trend growth in China will likely affect their trading partners in Southeast Asia and will likely be felt in the Philippines too. The hiring of OFs in Europe will likely slow down too and could potentially dampen the prospects for faster OF remittances, and services (Tourism, BPO, etc.) growth.
Will the PHL economy experience a recession too? What growth are we expecting for the PHL next year?
- The PHL economy has a big chance of avoiding a recession in 2023 due to the following factors:
- The lagging sectors of the economy will continue to benefit from the resumption of activities banned during the height of Covid lockdowns
- Combined with the said recovery, Favorable demographics will mean household consumption will grow by at least 5% in 2023
- Full-year real GDP growth is expected to be between 5% to 6% versus the government’s expectation of 6% to 7% GDP growth as inflation finally erodes overall demand and the lagged effects of rapid policy tightening finally gain traction. Inflation is likely to remain above 4% in 2023 and will continue to hurt the economy during the early part of next year. Inflation is expected to stay close if not only slightly lower than 5% after reaching nearly 6% this year.
How will the exchange rate, and interest rates perform in 2023 compared to 2022?
- The PHL current account deficit will likely be smaller in 2023 (4.5% of GDP) compared to 2022 (5.8% of GDP). With slower hikes, a pause, and a cut later on in 2023, portfolio flows will likely reverse in 2023 to provide additional support to PHP.
- BSP will probably not cut rates as quickly as the Federal Reserve in late 2023 and would probably keep a comfortable RRP interest premium over US FOMC rates in order to rebuild the PHL economy’s external buffers. It will also probably refrain from cutting the policy rate until it is able to deliver on its promise to lower the Reserve Requirement Ratio (RRR) by late 2023.
- Domestic interest rates will likely peak in either 2Q or 3Q2023 before they start falling in late 2023 or early 2024. Unfortunately, because the effect of monetary policy has lagged, the benefit to the economy will probably be felt well into 2024, rather than next year. This improvement in financial conditions combined with nominal growth of 10% next year will likely keep PHL’s debt-to-GDP ratio declining slightly but will likely remain above 60% through late 2023.
This is a press release.
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