Citigroup says PHL economy to grow slower

The Philippine economy will grow at a slower pace this year and next because of a host of factors foremost of which is fiscal underspending, according to a Citigroup report. Weak demand from abroad, supply chain disruptions and the uncertainties brought by the US and European debt crisis will also influence the Philippine economy, the US-based investment bank said Monday. Thus, it has lowered the gross domestic product (GDP) growth forecast to 3.7 percent from 3.9 percent this year and to 3.9 percent from 4.6 percent next year, Citigroup economist Jun Trinidad said in the bank’s latest Asia Macro and Strategy Outlook. "We further revise our GDP forecasts to 3.7 percent in fiscal year 2011 and 3.9 percent in fiscal year 2012, on the back of the Global headwinds, coupled with the low second quarter GDP base on the back of supply disruption risk and weak electronics demand," Trinidad said. Fiscal contraction in most developed economies could translate into slower spending in the second semester — a situation that bodes ill for the global trading environment, the economist pointed out. What could save the day is domestic demand in emerging market economies in Asia that would enable intra-Asian demand to cushion downside export risk and prevent a repeat of the global trade crunch in the fourth quarter of 2008, Trinidad explained. The third quarter was the worst period for exports and imports as supply disruptions and weak demand already leveled export growth in the second quarter, Trinidad added Citigroup sees government consumption expanding by 5.6 percent year-on-year in the second half and after contracting by 6 percent in the first half, the economist said. A fiscal spending surprise "Upside to GDP growth in second half of the year would come mainly from fiscal spending as the infrastructure budget is decompressed, alongside increased welfare spending led by conditional cash transfers," he added. A caveat though in Citigroup's sober baseline GDP scenario would be a fiscal spending surprise should the Aquino government decide to spend all the P189- billion unused portion of the non-interest program expenditures — as of August — for the remaining four months, according to the Citigroup report. "Higher-than-expected fiscal expenditures for the rest of the year would also shield consumer sentiment from the global fiscal storm, its job erosion threat and financial tightening effects," Trinidad explained. National Statistical Coordination Board (NSCB) data showed the country's GDP growth eased to 3.4 percent in the second quarter from 8.9 percent a year earlier. Citigroup also lowered its inflation forecast to 4.3 percent from 4.5 percent this year and to 3.5 percent from 3.7 percent next year. Consumer prices eased to a four-month low of 4.3 percent in August from 4.6 percent in July. "Despite monetary and fiscal flexibility, consumption is dependent on sentiment holding up as inflation expectations recede," Trinidad said. Citigroup also expects the peso dropping to 44:$1 from previous expectations of rising to 42:$1 as investors focus on the risk of unwinding that would likely intensify should the Euro debt crisis lead to defaults, and possible restructuring. "This leads us to shift our previous strong peso year-end outlook to a strong US dollar view; we now see the year-end peso level as closer to P44," Trinidad said. — VS, GMA News