By Luisa Maria Jacinta C. Jocson and Aaron Michael C. Sy, Reporters
THE PHILIPPINE ECONOMY’S most significant threat this year is the impending global trade conflict, as indicated by Security Bank, which may also compel the central bank to become more “external-dependent” due to these uncertainties.
“We’re less affected compared to countries like China and Japan should the automobile tariffs be implemented. However, we are not entirely insulated from a trade war,” stated Angelo B. Taningco, Vice-President and Head of the Research Division at Security Bank Corp., to reporters on Wednesday.
“As a part of the global value chain, we too will experience repercussions regarding the growth of our exports, leading to a decline.”
Security Bank anticipates that the country’s gross domestic product (GDP) will expand by 6.1% this year, which is at the lower end of the government’s target of 6-8%.
Nonetheless, this baseline scenario does not factor in the effects of a potential trade war.
Mr. Taningco remarked that achieving a 6.1% growth will be “challenging” for the Philippines if trade uncertainties come to fruition.
“It hinges on the extent of the trade war. It also depends on the increase in tariffs,” he elaborated.
Markets are preparing for the possible consequences of US President Donald J. Trump’s trade strategies, such as reciprocal tariffs imposed on all nations that tax US imports.
Since his inauguration in January, Mr. Trump has enacted a 10% tariff on imports from China. A 25% tariff on goods from Mexico and Canada, in addition to tariffs on all steel and aluminum imports, is scheduled to take effect next month.
Mr. Taningco indicated that should the US carry out its plans for reciprocal tariffs, retaliation from other nations is anticipated.
He noted that such “tit-for-tat” retaliation is likely to be more extensive compared to during Mr. Trump’s initial term, given the involvement of more countries.
POLICY INFLUENCE
The series of tariffs will have implications on US inflation and monetary easing, which may also affect the rate-cutting cycle in the Philippines.
“US inflation will worsen markedly if they do this in conjunction with tax reductions. Demand-driven inflation is concerning because it will surge, leading to an end of rate cuts,” Mr. Taningco stated.
“Economic growth will decline and that will be felt by the consumers. Typically, when US consumers feel anxious, they tend to reduce their spending plans.”
This could lead the Bangko Sentral ng Pilipinas (BSP) to become “more external-dependent,” remarked Mr. Taningco, in light of heightened global uncertainty.
“If tariffs are sharply increased, the chances for rate cuts in the US may be diminished. However, conversely, your growth opportunities will also be reduced. The central bank has a dual mandate, so it will be a challenging balancing act.”
Security Bank predicts that the BSP will reduce rates by a total of 50 basis points (bps) this year through 25-bp cuts at each of its meetings in June and October.
Mr. Taningco indicated that interest rates are not a pressing concern at this time. “It’s not yet essential to (act in) lockstep (with the Fed), given the uncertainties,” he commented.
“But if you were to ask me, it’s safer to proceed in lockstep. If the Fed reduces rates now, then we could follow suit, hypothetically.”
The BSP unexpectedly kept the benchmark rate steady at 5.75% during its Feb. 13 meeting. BSP Governor Eli M. Remolona, Jr. explained that the hold was due to “global trade uncertainties,” following three consecutive meetings of rate cuts since the beginning of its easing cycle in August.
Meanwhile, Security Bank forecasts that the peso will stabilize at P58 per dollar this year. He further noted that the peso is unlikely to dip below the record-low P59 level this year.
“Overall, the new threat of a trade war poses significantly higher risks, and the implication for the market is that the dollar will likely weaken, although it is regarded as a safe-haven currency.”
The peso finished at P57.88 per dollar, a strengthening of five centavos from its P57.93 close on Tuesday.
Conversely, Mr. Taningco remarked that growth will be bolstered by spending related to the upcoming elections in May.
“Historically, GDP tends to be higher during an election year compared to the previous election year. Therefore, there’s potential for upside this year compared to last year,” he stated.
ACCELERATED CONSUMPTION
In the meantime, UBS Investment Bank Global Research anticipates that Philippine GDP will grow by 5.9% this year, with faster growth expected in 2024 amidst a rebound in domestic consumption and investments.
“We foresee an improved growth outlook for the Philippines. We predict GDP growth to increase from 5.6% in 2024 to 5.9% in 2025, which aligns closely with the trend,” stated Grace Lim, ASEAN and Asia Economist at UBS Investment Bank Global Research, during a webinar on Wednesday.
“This underlying positive growth is driven by domestic demand as both investment and consumption gain momentum heading into 2025,” she added.
Ms. Lim indicated that household consumption will be bolstered by growth in the labor market and a decrease in food inflation.
“The labor market continues to remain strong, with the unemployment rate stable and low at around 3%,” she noted.
Private consumption, which makes up approximately three-fourths of the economy, grew by 4.8% in 2024, down from 5.6% in 2023.
The unemployment rate dropped to a record low of 3.8% in 2024, equating to 1.94 million unemployed Filipinos.
“With gradually decreasing food prices as some supply constraints ease and resilient labor incomes, we anticipate consumption to see a gradual recovery from the second quarter of 2025 onwards, following a period of high inflation which negatively impacted consumer sentiment,” Ms. Lim remarked.
Headline inflation accelerated to 2.9% in January, remaining steady since December.
However, food inflation alone rose to 4% from 3.5% in December and 3.3% in 2024.
Ms. Lim pointed out that food inflation may experience volatility due to supply shocks in the food sector caused by weather-related risks.
“Moreover, we believe that government spending can lend some support to growth, especially in the first half of 2025… We also envision private investment to gradually recover as financial conditions become less constrictive and as consumer sentiment improves,” Ms. Lim further added.
Additional monetary easing by the BSP, along with a reduction in banks’ reserve requirement ratio, is anticipated to stimulate private investments.
UBS forecasts that the BSP will lower rates two times this year, once in April and then again in September.