Philippine economy robust but cracks are appearing - BBH

Marc Chandler, Global Head of Currency Strategy at BBH, notes that the Philippine central bank will soon have a new governor and he inherits a robust economy, but inflation is rising and cracks are starting to appear in the budgetary and external accounts.  

Key quotes:

ECONOMIC OUTLOOK

"The economy is still robust.  GDP growth is forecast by the IMF at 6.8% in 2017 and 6.9% in 2018, little changed from 6.8% in 2016.  GDP rose 6.6% y/y in Q4, just below the cycle high of 7% y/y in both Q2 and Q3.  However, China’s economy appears to be softening and so we believe there are some downside risks to the growth forecasts."  

"Price pressures bear watching, with CPI rising 3.4% y/y in April.  This was the highest rate since November 2014, but remains within the 2-4% target range.  The central bank forecasts inflation of 3.4% in 2017 and 3.0% in 2018.  The current outlook supports the case for steady rates for now, though low base effects suggest inflation will accelerate in the coming months and may necessitate a more hawkish stance.  Indeed, the bank said at this week’s policy meeting that it sees upside risks to inflation."

INVESTMENT OUTLOOK

"The peso continues to underperform.  In 2016, PHP fell -5% vs. USD and was ahead of only the worst performers ARS (-18%), TRY (-17%), MXN (-16%), and CNY (-6.5%).  So far in 2017, PHP is down -0.5% YTD and is ahead of only the worst performer TRY (-1.5%).  Our EM FX model shows the peso to have STRONG fundamentals, so this year’s underperformance should ebb."

"USD/PHP has traded mostly in a narrow 49.40-50.40 range this year.  The pair appears on track to test the June 2006 high near 53.65.  After that, the February 2004 high near 56.50 comes into focus.  The 200-day moving average comes in near 49.09 currently."