Philippine Economic Expansion Accelerated to Fastest Pace in Three Years

Philippine economic growth accelerated more than forecast in the first quarter, putting pressure on the central bank to raise interest rates even amid concern the European debt crisis will derail the global recovery.

Gross domestic product increased 7.3 percent from a year earlier, compared with a revised 2.1 percent gain in the three months through December, the National Statistical Coordination Board said in Manila today. That’s the fastest pace since the second quarter of 2007, and beats the 4.4 percent median forecast of 15 economists surveyed by Bloomberg News.

“This is very impressive growth,” said Simon Wong, an economist at Standard Chartered Plc in Hong Kong. “The central bank will still keep policy rates unchanged in their next meeting but may say they are ready to raise interest rates once the threat of the Europe debt problem recedes.”

The peso rose as officials said they may raise the 2010 growth forecast and “reassess” the impact of faster growth on inflation. The recovery in Asian economies is outpacing the rest of the world, prompting central banks in the region to begin raising interest rates as prices climb.

Philippine inflation held at 4.4 percent in April, the fastest pace since December, as oil and food costs rose amid the global economic recovery. Consumer prices may have climbed as much as 5.1 percent in May, Bangko Sentral ng Pilipinas Governor Amando Tetangco estimated yesterday. That would be the fastest pace in 14 months.

Growth Forecast

The government may raise its 2010 growth forecast from the current 2.6 percent-to-3.6 percent range, Economic Planning Secretary Augusto Santos said today.

“We will reassess to see how this more upbeat GDP outlook would impact on investor sentiment, domestic demand and inflation expectations, as well as our inflation forecast,” Tetangco said in a mobile-phone text message today. The first- quarter growth is “another important factor to consider in deciding monetary policy stance,” Deputy Governor Diwa Guinigundo said in a separate message.

Tetangco said yesterday Bangko Sentral “will closely consider” the impact of the European debt crisis and rising tension between North and South Korea at next week’s policy meeting. Italy, Spain and Portugal are imposing budget reductions after European Union leaders set up a 750 billion- euro ($917 billion) financial lifeline to backstop the region’s most-indebted nations.

Policy Meeting

“The positive economic activity last quarter does not necessarily signal growth is sustainable,” Roland Avante, treasurer at Sterling Bank of Asia in Manila, said before the GDP report. “It may be too early to increase the benchmark rate given the uncertainties brought about by the debt problems in Europe.”

Bangko Sentral’s next meeting on June 3 will be a “balancing act” as policy makers try to curb inflation without stifling economic growth, Guinigundo said May 12. The Philippines has pared a lending program for banks this year while keeping the benchmark interest rate at a record-low 4 percent.

Four out of 11 economists surveyed by Bloomberg before today’s GDP report predict the central bank will raise its benchmark interest rate to 4.25 percent this quarter, with the rest forecasting an increase in the third quarter.

“This increases the likelihood that interest rates will be raised by the central bank,” Jonathan Ravelas, an economist at Manila-based Banco de Oro Unibank Inc., said after today’s data. “This growth is just too fast. If this rapid growth continues the inflationary risks go up.”

Peso Gains

Malaysia’s central bank raised interest rates in May for the second time this year after the economy expanded 10.1 percent in the first quarter, the most in a decade. Indonesia’s GDP grew at the fastest pace in more than a year last quarter, rising 5.7 percent from a year earlier.

The peso rose 0.4 percent to 46.518 per dollar at 11:04 a.m. in Manila, climbing from 46.6 before the GDP report. Benchmark four-year bond yields dropped 2.5 basis points.

The first-quarter growth rate “is a big surprise,” said Ron Rodrigo, head of research at Manila-based DBP Daiwa SB Capital Markets. “This far exceeds what the government forecast and the markets expected. This supports the positive outlook for corporate earnings. Companies are gearing for an economic recovery.”

Senator Benigno Aquino, who leads vote tallies for this month’s presidential election, has pledged to create jobs and lure investments to boost incomes and spur growth.

Ayala Land Inc., the Philippines’ largest developer, plans a record 27.2 billion pesos ($585 million) in capital spending this year as Filipinos buy more homes and apartments, the company said last month.

Consumer spending, which accounts for about 70 percent of the economy, rose 5.9 percent last quarter from a year earlier, according to today’s report. Exports surged 28.1 percent in peso terms. Remittances from the more than 8 million Filipinos living overseas gained 11.3 percent in peso terms.

To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net

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