Off to a good start

PHILIPPINES - In Brief 10 May 2018 by Romeo Bernardo

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GDP grew 6.8% in 1Q18, among the best in the region and in line with analysts’ estimates. Driving growth were domestic demand components, particularly:(a) household consumption, which grew 5.6% on the back of a 10% growth in peso remittances, despite rising inflation and crude oil prices;(b) public sector, with government consumption contributing 1.4ppt to growth and public construction adding another 0.4ppt; and(c) private construction showing improved growth (6.8%) relative to its tepid performance in the previous three quarters (0.6%, 0.7%, 1.7%), as well as continuing investments in durable equipment. The poor performance of goods exports in 1Q18 resulted in a much greater drag from net exports of goods and services (the deficit widened by 25%). Production figures show that economic growth was generated mainly by services and industry.The economy’s robust growth provided room for monetary authorities to tighten policy today, a move widely expected by financial markets. In its meeting, the Monetary Board raised its key policy rate, the overnight reverse repurchase (RRP) rate, by 25bp from 3% to 3.25%, to “help arrest potential second-round effects by tempering the buildup in inflation expectations.” It likewise adjusted the upper and lower bounds of its interest rate corridor by the same increment to 3.75% and 2.75, respectively. It also announced a higher inflation forecast of 4.6% for 2018 (from 3.9%) and 3.4% for 2019 (from 3%). Policy watchfulness, including in the micro areas of rice trade, wage adjustments and distribution of cash transfers, would be needed to keep the economic engine humming nicely ahead, in our view. Risks are titled to the downside, from bo...