A gradual slope
Recent macroeconomic data show encouraging signs of normalizing domestic activity. Inflation and interest rates have dropped, public sector outlays appear to be getting back on track and work on reform bills that have held back investments are proceeding apace. We forecast a gradual uphill for GDP growth, from 5.9% this year 6.2% in 2020, helped by expansionary fiscal and monetary policies. Risks at this time remain tilted to the downside considering global policy uncertainties that may keep investors sidelined longer. Upsides to our forecast that would allow GDP to reach the government’s 6.5% low-end target hinge on more investment activity, which in turn depends on the speed of public infrastructure as well as implementation of structural reforms (e.g., rice tariffication, ease of doing business, national ID, corporate tax reforms) to help shore up investor and consumer confidence.
Going forward, we expect monetary stance to be more cautious, allowing first this year’s aggressive cuts in policy rates and reserve requirement ratios to work their way through the economy; and watchful of what the US Fed will do next. While the peso has been surprisingly strong this year, we expect it to revert to a depreciating trend given an expected widening of the current account deficit.
Politically, the reform window will soon be closing. We expect the administration-supported economic bills to hurdle the legislative mill, although with compromises expected in the tax reform packages. Priorities will then shift more and more to the 2022 electoral contest with, we expect, succession planning topmost in the President’s mind.
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