Philippines surprises with robust Q3 growth, leads Southeast Asia

MANILA - The Philippine economy picked up more than expected in the third quarter as strong domestic demand kept it relatively insulated from the global downturn, reducing the odds of an interest rate cut in December.

A sharp jump in third-quarter farm output and a late rebound in exports also contributed to the economy's 1.3 per cent growth rate in the July-September quarter from April-June, which was three times as fast as economists had predicted.

Like many of its Southeast Asian neighbours, robust domestic consumption and higher government spending have helped cushion the Philippine economy from the worst of the global slowdown, while manageable inflation has allowed Philippine authorities to keep interest rates accommodative for growth.

The Philippines, once known as "the sick man of Asia", posted the second strongest annual economic growth in Asia in the third quarter, lagging only China.

"We are well on our way to surpassing our growth target of 5 to 6 per cent this year," Arsenio Balisacan, economic planning secretary, told reporters on Wednesday.

The government's plan to raise spending further and forecasts that inflation will remain manageable will ensure the economy retains much of its momentum into 2013, he added.

Manila has set a record infrastructure budget of over 400 billion Philippine pesos (S$12 billion) next year as it pursues major upgrades of roads, ports, bridges, and airports to speed up growth and boost private investment.

Philippine Finance Secretary Cesar Purisima said the latest growth data was higher than the country's trend growth of 4.7 per cent in the last decade. Growth in the first nine months was 6.5 per cent from the same period a year earlier, exceeding the government's full-year target.

The Philippines is the only economy in the world which the International Monetary Fund believes will grow faster than earlier anticipated this year.

The IMF earlier this month raised its 2012 growth outlook for the country to more than 5 per cent from its October forecast of 4.8 per cent, citing its sound fiscal and monetary policies.

"The Philippines is the diamond of the region this year,"said Enrico Tanuwidjaja, economist for Southeast Asia at RBS in Singapore.

Remittances a major growth driver

The government had targeted a faster growth rate of 5 to 6 per cent this year compared with 3.9 per cent in 2011, banking on domestic demand and higher state spending to offset weak global demand for the country's exports.

Economists polled by Reuters had forecast the economy would grow 0.4 per cent in July-September from the previous quarter on a seasonally adjusted basis, picking up from 0.2 per cent originally reported in April-June.

But revised data on Wednesday showed first- and second-quarter growth were far stronger at 2.5 per cent and 1.2 per cent, respectively, indicating the economy carried much more momentum into the summer than first thought. Manila earlier reported first-quarter growth of 0.9 per cent from the previous three months.

From a year earlier, the economy grew 7.1 per cent in the third quarter, not far behind China's 7.4 per cent and the fastest in Southeast Asia.

Indonesia, Southeast Asia's largest economy, expanded 6.2 per cent in the third quarter, while Malaysia grew 5.2 per cent and Thailand 3.0 per cent.

Domestic consumption remained firm, supported by remittances from Filipinos abroad. Private spending has been on a steady ascent this year, climbing an annual 6.2 per cent in the third quarter, the fastest growth in three quarters.

Among industries, construction posted its highest growth in at least six quarters, jumping 24.3 per cent from a year earlier as Manila enjoys the best property boom in two decades.

Public consumption expanded an annual 12 per cent in the third quarter, almost double the rate in the second quarter.

Rates steady

To cushion the economy from the global downdraft, the central bank has cut its key policy rate by a total of 100 basis points so far this year to a record low of 3.5 per cent.

Last week, the central bank released data showing businesses were more confident in the fourth quarter than in the third given expectations of an increase in business activity and demand, low inflation and interest rates, and favourable macroeconomic conditions.

Central bank Governor Amando Tetangco said after the GDP data that its current stance was appropriate for now but added authorities will carefully steer policy to sustain strong growth and manage risks from capital inflows.

Policymakers meet for the last time this year on Dec. 13 and analysts expect the policy rate to be kept steady well into 2013.

"We have probably already seen the bottom of the rate-cut cycle. Our call is still neutral until probably June 2013," RBS' Taniwudjaja said.

"If the reforms continue especially in revenue collections and efficiency in public spending, this will continue to support growth next year," he said.

However, the continued rise of the peso against the dollar may warrant policy action. The central bank has said it was revisiting foreign exchange liberalisation measures to counter the rapid appreciation of the local currency.

Balisacan said upward pressures on the peso should ease next year as major infrastructure projects under the private-public partnership scheme get underway and as the Finance department continues to tap the country's record foreign reserves to pay its foreign debts.

The peso is Asia's best performing currency so far this year, up more than 7 per cent against the US dollar on strong foreign inflows into Philippine stocks and bonds, fueled by forecasts of sustained and resilient domestic growth.

A recent Reuters poll showed further gains in the currency were expected.