Philippines second-quarter GDP growth quickens on construction boom, drugs war poses risk

Philippines second-quarter GDP growth quickens on construction boom, drugs war poses risk

Romeo Ranoco

MANILA (Reuters) - The Philippine economy grew at a sizzling pace in the second quarter, topping expectations as a government-led construction boom and an extended rebound in the farm sector took some of the sting off a peso currency wallowing at 11-year lows.

The Southeast Asian nation is the second-fastest growing economy in Asia after China, though some analysts cautioned that activity could wane if foreign investors are scared off by President Rodrigo Duterte's deadly war on drugs.

Gross domestic product rose 6.5 percent in the second quarter from a year earlier, the national statistics agency said on Thursday, picking up from the 6.4 percent pace in the first quarter, and above the 6.2 percent forecast in a Reuters poll.

Quarter-on-quarter growth at 1.7 percent also topped the 1.6 percent pace projected in a Reuters poll, and faster than the previous quarter's upwardly revised 1.3 percent.

"We are well on track to meeting our full-year target growth of 6.5-7.5 percent," Economic Planning Secretary Ernesto Pernia told reporters at a briefing.

Like its regional peers, the Philippines has benefited from an improvement in global demand, with exports up nearly 14 percent in the six months to June.

Household consumption grew at slightly faster annual pace of 5.9 percent in the second quarter compared with 5.8 percent in the first, while government spending jumped 7.1 percent in a dramatic rise from the revised 0.1 percent gain in the March quarter.

"The sequential increase implies that the economy is gaining momentum," said ANZ economist Eugenia Fabon Victorino in a note to clients.

DRUGS WAR, PESO WOES

Indeed, Manila aims to lift growth to as much as 8 percent during Duterte's term through a six-year, $180 billion "Build, Build, Build" infrastructure program.

All the same, the outlook is not without risks, according Capital Economics senior economist Gareth Leather, who said that Duterte's controversial war on drugs has started to undermine investor sentiment.

The security crisis in the southern city of Marawi is also a "potential risk to the near-term economic outlook," as it could deter foreign direct investment into the country, said Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit.

Thousands of people have been killed in the anti-drugs campaign, Duterte's signature policy, since it was launched on June 30 last year, with the intensity of the crackdown alarming the international community.

Duterte has repeatedly said solving the drugs scourge was necessary for the economy to prosper.

Investors were also focused on the peso currency following a sharp slide since July though it was steady after the GDP report.

Policymakers have sought to soothe frayed nerves in the foreign exchange market after the peso hit an 11-year low, saying currency movements do not reflect the underlying strength of the local economy.

Bangko Sentral ng Pilipinas Governor Nestor Espenilla said on Thursday the central bank was "ready to adopt policies" to keep prices and financial markets stable.

The central bank has kept policy settings steady since a 25-basis-point hike in September 2014.

A construction boom in the Philippines has contributed to the peso weakening amid a recent surge in capital goods imports, setting the nation on course to book its first annual current account deficit in 15 years.

The infrastructure drive saw public construction surge 12.0 percent in the second quarter from 1.9 percent in the first three months of the year, but private building work slowed to 4.7 percent from 13.0 percent in the March quarter.

Property developers have reported strong earnings in the first half, with Ayala Land posting an 18 percent increase in net income, while Megaworld's net profit rose 11 percent.

"We are optimistic that the accelerated state spending and project implementation would keep the Philippines in the club of Asia's fastest-growing economies," Finance Secretary Carlos Dominguez said in a statement.

(Reporting by Enrico dela Cruz; Writing by Karen Lema; Editing by Shri Navaratnam)

TOP READS FROM THE FISCAL TIMES