Overview

• Philippine 4Q GDP growth remained broadly stable at 6.1% YoY.
• Full year 2018 growth at 6.2% – slightly lower than market consensus (consensus: 6.3%; SBC: 6.3%) and far below the revised government target range of 6.5% – 6.9% for the year. GDP in 2017 was 6.7%.

Key Points for 4Q 2018:

1. The main drivers of growth for the quarter were higher private consumption (5.4% YoY) and government spending (11.9% YoY), helping to offset drags from traditional growth sources.
2. In terms of sectors, the industry sector posted the fastest growth at 6.9%. This was followed by services, growing by 6.3%, and agriculture, by 1.7%.
3. Net Primary Income (NPI)* grew to only 0.9%, compared with 3.7% in the same quarter of 2017.
4. As a result, Gross National Income (GNI) posted a growth of 5.2% compared with 6.7% the previous year.
5. On a sequential basis, the pace of growth was slightly faster at 1.6% QoQ (from 1.5% QoQ from previous).

Key Points for Full Year 2018:

1. Full year growth was hampered by high inflation, resulting in slower investments and government spending, as well as a stagnant exports sector.
2. Services sector had the highest contribution to GDP growth for the year, contributing 3.8% – this despite constraints from the inflation and the consumption deficit. Industry contributed 2.3% and Agriculture was at 0.1%.
3. GNI grew by 5.8% for the year, while NPI’s was at 3.7%.

2019 Outlook:

For 2019, we expect growth to be subdued in 1H on the back of the delayed passage of the national budget, plus an infrastructure spending ban due to the forthcoming midterm elections, thus possibly hampering crucial government spending necessary for further growth. Moderate growth will be seen by 2H as overall spending, including lagged effects from elections spending – will pick up while inflation continues to taper – which we forecast to be within the 3.5% – 4% range by Q3 of this year – brought about by the liberalization of rice imports, food stability and presumed lower global energy prices.

We expect the BSP to keep policy rates on hold at its first policy meeting on February 7 following five consecutive rate hikes last year. This after the BSP has adopted a “wait-and-see” stance relative to lagged effects of the hikes to allow it to permeate in the economy.  With favorable economic conditions, the central bank may cut policy rates by 25bp as early as Q2. Finally, we also see a possible slashing of RRR in Q1 on the back of the central bank’s pledge to contain ratios to single digits. These are expected to be the catalysts for 2H growth.