Boston, MA -- (SBWIRE) -- 03/19/2013 -- Core Views

Following estimated growth of 6.0% in 2012, we forecast the Philippine economy to expand by 5.0% in 2012. Leading the way forward, we envisage a strong comeback in fixed capital growth in 2013, and believe that this will mark the beginning of a longer-term resurgence in investment.

Inflation ended 2012 at a benign 2.9%, but we retain our end 2013 inflation forecasts of 4.0% as price pressures are expected to rise gradually as a result of strong economic activity and loan growth on the back of easy monetary policy. At the same time, we do not expect the Bangko Sentral ng Pilipinas (BSP) to raise its benchmark interest rate before the end of 2013. While we are currently forecasting for the central bank's benchmark interest rate to end 2013 at its current 3.50%, and we continue to believe that risks to this forecast are to the downside, with additional rate cuts not out of the question.

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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 2.0% of GDP in 2013. While spending continues to be limited by administrative difficulties, revenue growth will be supported by the government's increasing tax collection efficacy and the introduction of a wide-ranging sin tax. Notably, we believe that 2013 will be the year in which the Philippines achieves an investment grade rating from at least one of the three major ratings agencies in view of the country's improved growth outlook and the government's increasingly consolidated fiscal position.

Major Forecast Changes

We have upgraded our 2012 and 2013 GDP growth forecasts to 6.0% and 5.0% respectively in light of the economy's impressive trade performance and our expectations for an investment revival in 2013

Following the BSP's rate cut to 3.50%, we expect the central bank to keep its key policy rate on hold for a potentially extended period as growth continues to outperform amid a dovish inflationary environment.

We have upgraded our end 2013 forecast for the Philippine peso to PHP41.50/US$, and note that risks to this forecast remain to the upside given the large scale of the US Federal Reserve's QE3 initiative and continued strong hot money inflows into the Philippines.

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