DOMESTIC DEMAND in the Philippines and other emerging Asian economies is expected to remain muted amid a high interest rate environment, S&P Global Ratings said.
“Consumer demand is more subdued in the Philippines with elevated interest rates (with the policy rate at 6.5%) and weak consumer confidence,” S&P said in its Emerging Markets (EM) Monthly Highlights.
The Bangko Sentral ng Pilipinas (BSP) kept its key rate to an over 17-year high of 6.5% since October 2023 to tame inflation.
“Opposing forces are at work as consumer demand remains broadly stable in EM Asia. On the one hand, demand is dampened by tighter monetary policy and spillovers from weaker economic growth last year,” it said.
“On the other hand, resilient labor markets and recovering tourism are supporting consumption activity.”
In the first quarter, the Philippine gross domestic product (GDP) grew by a weaker-than-expected 5.7%.
Household spending, which accounts for about three-fourths of growth, grew by 4.6%. This was its slowest pace since the 4.8% decline in the first quarter of 2021.
“We observe a slowdown in long-term GDP growth across some EMs, mostly because of slower labor productivity and fixed investment,” S&P Global said.
“In an environment of high interest rates, EM Asian economies with higher domestic savings may be better positioned to finance investments and boost long-term growth prospects,” it said.
The Philippines is targeting 6-7% economic growth this year, 6.5-7.5% for 2025 and 6.5-8% for 2026 to 2028.
However, S&P Global said it sees stronger GDP growth in the region this year compared with 2023, although there are risks to this outlook.
“In several economies, policy-related risks have risen following elections that are generating uncertainty over reforms, fiscal trajectories, and institutional frameworks,” it said.
S&P Global expects Philippine GDP growth to average 5.8% this year, falling short of the government’s goal.
“Policy uncertainty could exacerbate existing risks. Policy uncertainty will be a key factor late in the year and into 2025 as US elections play out and new administrations in key EMs begin to execute their plans,” it added.
The US presidential election is scheduled for Nov. 5.
In the Philippines, the midterm elections will be held in May 2025 and will have Filipinos voting for senators and local officials such as congressmen, governors, and mayors, among others.
Meanwhile, the credit rater said it also expects the delay in US Federal Reserve’s easing cycle to also impact monetary loosening in the region.
“A later-than-anticipated start to the Fed’s interest rate cuts will contribute to slower monetary policy normalization in most major EMs, though our view on terminal benchmark interest rates remains unchanged,” it said.
BSP Governor Eli M. Remolona, Jr. has said that the central bank is on track to begin cutting rates by August this year.
The BSP could cut by up to 50 basis points (bps) for the full-year, he added, through 25-bp cuts in the third and fourth quarters.
S&P Global also noted easing food inflation in the region. “Food inflation has been moderating in the past 12 months, but at an uneven pace across EMs.”
In the Philippines, headline inflation slowed to 3.7% in June from 3.9% in May, marking the seventh straight month that inflation settled within the BSP’s 2-4% target band.
Though food inflation in June quickened to 6.5%, rice inflation eased to 22.5% from 23% a month earlier. Rice accounts for nearly half of overall inflation.
“Most economies in the region are highly dependent on food imports, particularly on wheat, rice and corn,” S&P Global said.
“Despite some moderation, prices for several key food commodities, such as wheat and rice, remain around 10-15% above pre-2022 levels. Inflationary pressures stemming from elevated food prices continue to complicate disinflation trajectories for food-importing EMs,” it added.
For the first half of the year, inflation averaged 3.5%, slightly above the central bank’s 3.3% full-year forecast. — Luisa Maria Jacinta C. Jocson
