Philippines' surprisingly strong Q1 growth eclipses China

The Philippines on Thursday posted surprisingly strong growth in the first quarter, knocking China from pole position in Asia, driven by robust domestic consumption and government spending.

The stellar pace of expansion, which blew past expectations, pulled the peso up from an 11-month low and cemented views the central bank would leave its key policy rate on hold this year.

Growth is seen powering on after the Philippines earlier this month got an investment grade rating from Standard & Poor's, the second debt agency to do so this year. That lowers borrowing costs and helps to attract foreign capital for an economy mired with high unemployment and poverty.

First quarter GDP grew a seasonally adjusted 2.2 percent over the prior three months, the fastest clip since the first quarter of 2012. A Reuters poll of economists had forecast 1.6 percent growth.

From a year earlier, the economy grew 7.8 percent, helped by robust domestic spending, making the Philippines the fastest growing economy in Asia as it pushed past China's 7.7 percent annual pace and 1.6 percent quarterly growth.

The Philippines' year-on-year GDP figure also topped the 6.1 percent growth forecast in a Reuters poll and was the fastest since the second quarter of 2010, then boosted by spending related to national elections that put President Benigno Aquino in power.

"We may now be moving along a new growth trajectory," economic planning chief Arsenio Balisacan told reporters.

Capital formation jumped an annual 47.7 percent in the first quarter as the private sector invested heavily to expand capacity given strong domestic consumption.

Public construction climbed 45.6 percent as a faster budget roll-out and better fiscal position allowed for more spending to rehabilitate decrepit school buildings, roads and bridges.

Per capita GDP grew an annual 6.1 percent in the first quarter, the highest in at least two years, although unemployment was at a year-high of 7.1 percent as of March.

With a fast-growing population, estimated at 96.8 million as of March, job creation can't keep pace with the around 1 million new entrants to the job market every year, Balisacan said.

The challenge was to create more broad-based growth so that the poorer sectors of society could benefit from jobs in high growth sectors, he added.

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For a graphic on GDP, inflation and interest rates:

http://link.reuters.com/jep55s

Quarterly Reuters poll on the Philippines

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Bernard Aw, analyst at Forecastweb in Singapore said the Philippines' improved risk and debt profile would help shield the peso from external vagaries.

The export-reliant Philippines is facing some risk that demand for its high-tech products will slow on more evidence that the recovery in global growth is losing momentum.

But the global slowdown had little impact on manufacturing. Data showed the sector grew an annual 9.7 percent in the first quarter on domestic demand for food items, household appliances, chemicals, and communication, transport and machinery equipment.

Market reaction was mixed. While the peso was up at 42.28 per dollar, the local stock market slid as much as 3.4 percent in line with sharp declines in regional bourses.

RATES SEEN ON HOLD

At a time when several regional central banks have cut rates to bolster growth, economists said the Philippine central bank would most likely leave its key overnight borrowing rate on hold for the rest of the year. Inflation is forecast to stay within the central bank's 3 to 5 percent target band this year despite strong growth.

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco said he did not foresee the inflation target being breached over the policy horizon despite strong GDP growth.

The central bank next meets to review policy on June 13. It has kept its policy rate steady at a record low of 3.5 percent since December 2012, but has slashed the rate on its special deposit account (SDA) facility by more than 200 basis points since July 2012 to divert credit to more productive use.

"We think the BSP will continue to cut the SDA rate to lift domestic spending as well as save costs," said Trinh Nguyen, economist at HSBC in Hong Kong. The central bank has incurred heavy losses as the SDA facility attracted huge liquidity.

With the outlook on exports still murky, domestic consumption will remain as the main driver for economic growth this year. Manila is targeting growth of 6 percent to 7 percent in 2013 after an upwardly revised 6.8 percent expansion the prior year.

(Writing by Rosemarie Francisco; Editing by Jacqueline Wong)