* The Philippine economy is well positioned to maintain its strong growth trajectory over the coming quarters on the back of booming domestic services and construction sectors, and we maintain our forecast for real GDP growth to come in at 6.0% in 2016. Q116 GDP data marked a continuation of the economy's domestic resilience in the face of a difficult external environment, with real GDP growth accelerating to 6.9% following a 6.3% pace in Q415.
* We expect the Bangko Sentral Pilipinas (BSP) to keep its new benchmark interest rate on hold at 3.00% throughout the remainder of 2016, as the balance between modest inflation and strong growth remains ideal. Risks to this forecast are roughly in balance, including a prolonged and worse than expected El Nino (which could potentially lead to rate hikes to curb inflationary pressures) and a stagnation in growth as a result of political risk, which could lead the central bank to cut.
* Philippine President Rodrigo Duterte, who was sworn in on June 30, is set to shake up both the economic and political environment in the Philippines over the next six years. A Duterte presidency poses considerable risks to the Philippines' relatively sanguine outlook, chiefly because the outgoing Aquino administration ushered in a period of resurgence in the previously languid Philippine economy. In view of the associated uncertainties, we have downgraded the Philippines' short-term political risk score to 66.3, from 68.8 previously.
Major Forecast Changes
* The Philippine peso has come under pressure from the UK's shock decision to leave the EU on June 24, and we believe that the currency will experience continued volatility over the near-term. At the same time, the peso's technical outlook is poor, suggesting a continued depreciation in the face of strong technical resistance . As such, we have downgraded our end-2016 forecast on the peso to PHP49.00/USD, from PHP47.00/USD previously, reflecting our expectations for the currency to experience additional depreciation over the next three-to-six months.
Key Risks To Outlook
*Growth slowdowns in both China and Japan, to which the Philippines is heavily exposed in both investment and trade terms, could undermine the country's strong domestic growth story.
*The potential for a deeper-than-expected depreciation of the Chinese yuan by the People's Bank of China (PBOC) would likely weigh on the Philippine peso. A weaker yuan could see the BSP allow for a further weakening of the peso in order to maintain the competitiveness of Philippine exports relative to Chinese exports.
|Nominal GDP, USDbn||285.8||300.3||306.0||330.9|
|Real GDP growth, % y-o-y||6.1||5.8||6.0||5.9|
|Consumer price inflation, % y-o-y, eop||2.7||1.5||2.5||4.0|
|Exchange rate PHP/USD, eop||44.72||46.91||49.00||48.00|
|Budget balance, % of GDP||-0.6||-0.9||-0.8||-1.4|
|Current account balance, % of GDP||3.8||2.8||3.1||3.2|
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