Philippines sees brighter economic prospects in fourth quarter

Easing price pressure and lagged effects of recent cuts to borrowing costs should support consumer and investment spending, paving way for a better fourth-quarter economic performance.

Inflation: Low and slow

Consumer price rise for the full year 2024 appears to be well under control in the near term, following the surprisingly low September print of a 1.9% year-on-year. Annual headline inflation for the remaining months of the year will remain below the 3% level, averaging 3.2% for the full-year 2024, well-within the Bangko Sentral ng Pilipinas’ 2-4% inflation target.

Higher oil prices amid geopolitical tensions remain the biggest upside risk to inflation. Yet these remain at manageable levels compared to the same period last year and while needing monitoring may not necessarily require a shift in policy stance or direction. Even a major swing in oil costs may not be enough to push full-year inflation above BSP’s target in 2024 and 2025.

BSP to take another baby step

After announcing a 25-basis-point cut last October 16, BSP Governor Eli Remolona Jr. said that the BSP “prefers to take baby steps” in reducing the policy rate, “although not necessarily every quarter or every meeting.” This slight shift in tone has sparked the question of whether the Monetary Board (MB) will pause or slash rates again by another quarter-point at their December meeting.

Low inflation and soft consumption provide the BSP with scope to justify a continuation of its easing cycle, despite potential pressure from oil prices. As such, the costs of oil remain an attendant risk but have yet to fully materialize.

Metrobank Research expects the BSP to deliver another quarter-point policy rate cut in December, bringing the policy rate down to 5.75% by year-end.

‘Tis the season

The dollar has been gaining strength in recent weeks as markets continue to price in higher odds of Donald Trump winning the US presidential election in November. A Trump win would translate to a stronger dollar, with the former president leaning more toward dollar-supportive policies including corporate tax cuts, more government spending, and higher import tariffs.

As of October 18, the USD/PHP spot closed at 57.51. However, we project spot to decline in the fourth quarter considering the seasonal inflow of pay bonuses in outsourcing firms from the second half of October, and remittances from overseas Filipinos beginning November.

We see a stronger peso by year-end with the USD/PHP spot at 55.3.

GDP: Room for growth

The release of third-quarter gross domestic product (GDP) is just around the corner. We expect growth to ease a tad to 5.5% in the third quarter before picking up pace to 5.6% in the current quarter.

The projected moderation last quarter is mainly due to slow consumption and investment spending following lagged effects of the high-interest rate environment. Government spending may also ease after authorities’ streamlining of early procurement process made a fuller impact in the first half of the year. The trade deficit also widened in the third quarter from a year ago, with net exports likely adding a drag on GDP.

Still, consumer and investment spending will strengthen in the fourth quarter as BSP’s recent “measured” interest-rate cuts begin to make an impact. This will bring full year GDP growth to 5.7%.