Boston, MA -- (ReleaseWire) -- 09/14/2012 -- Core Views Following 2011's disappointing GDP growth of 3.7%, we estimate that the Philippine economy will bounce back only incrementally, with 3.9% growth forecast for 2012. Weak external demand as a result of a developing hard landing in China and the continued malaise in the eurozone and Japan will continue to weigh on exports, which we estimate will grow only 2.2% in 2012. Following Bangko Sentral ng Pilipinas' two rate cuts totalling 50 basis points in Q112 (matching our target), we now expect the central bank to keep rates on hold through the rest of 2012. Inflation, which has ticked down considerably to 2.6% in March, is expected to remain modest through the end of the year, and we continue to forecast it to increase only slightly over the course of 2012 to 3.4%. The Philippines' fiscal position continues to improve. We expect the budget deficit to widen to just 2.2% of GDP in 2012, compared with the government's projection of 2.6%, as spending continues to be limited by administrative difficulties. With its debt metrics also improving, the Philippines may be in line for a credit rating upgrade in 2012. However, we believe it will have to wait until at least 2013 before it achieves 'investment grade.' Major Forecast Changes While we have no major forecast changes for the Philippines, we highlight our expectation for weakness in the archipelago's trade figures to contribute to below-par growth in 2012. This is further supported by our forecasts for a 0.5% contraction in the eurozone in 2012 and weak growth of 1.4% in Japan, two of the Philippines' largest trade partners. Key Risks To Outlook Risks to our GDP forecast lie to the upside. A significant increase in government spending or a considerable pickup in exports on the back of an unexpected uptick in global trade are outside possibilities which could bring growth higher. A third round of quantitative easing from the US Federal Reserve remains a possibility. This, or a material improvement in the global economy, could see the Philippine peso outperform our bearish end-of-2012 forecast of PHP46.00/US$.
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