Boston, MA -- (SBWIRE) -- 11/22/2013 -- The Philippine economy was able to buck financial market stress and ongoing external weaknesses in Q213, posting impressive 7.5% y-o-y real GDP growth against consensus estimates for a 7.2% expansion. Indeed, the domestic economy is still the picture of health, and it remains the key driver of the country's growth boom, with both investment and private consumption leading the way.

Despite the fact that the Philippines has passed another expansionary budget for 2013, we expect the budget deficit to widen to come in at a manageable 2.2% of GDP in 2013. While the rate of spending over H113 increased somewhat significantly, revenue growth should continue to be supported by the government's increasing tax collection efficacy and the introduction of a wide-ranging sin tax. As we expected, the Philippines has finally achieved an investment grade rating from all three major credit ratings agencies in view of the country's improved growth outlook and the government's increasingly consolidated fiscal position.

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As a result of a sanguine outlook for both inflation and economic growth over the near term, we believe that the Bangko Sentral ng Pilipinas (BSP) will be able to maintain its benchmark interest rate at an all-time low of 3.50% through at least the end of 2013. At the same time, the BSP will continue to cast a watchful eye towards hot money flows, and may yet decide to implement further macroprudential measures in order to minimise risks stemming from US monetary policy-related external volatility. .
Major Forecast Changes

As a result of a better than expected H113 performance, as well as a bright outlook over the coming quarters, we have upgraded our 2013 and 2014 full-year real GDP growth forecasts to 6.9% and 6.0%, respectively.

We have downgraded our 2013 headline inflation forecast to 2.9% from 3.4% previously, in line with relatively dovish inflationary fundamentals. That said, this forecast still entails a gradual increase in inflation over the coming months, and we expect this trend to continue into 2014.

Following the Philippine peso's recent sell-off as a result of strong hot money outflows following a bout of global risk aversion, we note that appreciatory and depreciatory forces on the currency are relatively in balance. As such, we have downgraded our end-year forecast on the unit to PHP43.50/US$ from PHP41.55/US$ previously, reflecting our neutral outlook on the peso over the short to medium term.

Key Risks To Outlook

The Philippines remains at risk of substantial hot money outflows as a result of lingering questions over the US Federal Reserve's Quantitative Easing programme.

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