Retail Set to Rise

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The Philippines’ retail sector is expected to ride a wave of consumer confidence, underpinned by strong economic growth and an increasing flow of remittances from expatriate Filipino workers.

After experiencing 1.1% GDP growth in 2009, the economy has shifted up a couple of gears – first-quarter growth in 2010 was 7.3% year-on-year. Figures released by the National Statistical Coordination Board in May showed that half of the first-quarter growth was due to increased activity in the retail sector.

Contributing to the growth of the retail sector is a rise in remittances from workers overseas. According to figures released in mid-May by the central bank, Bangko Sentral ng Pilipinas (BSP), more than $4.3bn from expatriate workers flowed into the economy in the first quarter, surpassing figures from the first quarter of last year by 7%. The increase has prompted the BSP to upgrade its expectations for capital inflow from remittances, which in turn has prompted a number of ratings agencies to raise their own growth projections for the Philippine economy.

The retail sector is also expected to benefit from the “feel good” factor remaining from the recent presidential election, which saw Senator Benigno Aquino III voted in as the next head of state. According to Marc Bautista, the head of research at Metrobank, increased consumer spending could contribute to GDP growth of up to 5.9% this year, well above current government estimates of 2.6-3.6%

“Given the optimism and expected economic activity within the initial ‘honeymoon period’ that a new Philippine presidency engenders, better GDP growth numbers are to be expected this year,” Bautista said in a June 2 interview with the local press.

Dennis Arroyo, the director of planning and policy at the National Economic and Development Authority, told local media that a revision of growth forecasts would be issued soon. He said the higher numbers would result from improving economic indicators and strong consumer confidence.

“Based on the new data, the time for being conservative is over,” Arroyo said.

There are, however, some issues that must still be taken into account in relation to increased activity in the retail sector. Some analysts suggest that the strong first-quarter growth was partly a result of higher spending ahead of the presidential election. If so, the impact would not carry through into the second half of the year, which in turn could see a slowing of expansion.

Analysts also question how surging commercial activity will affect inflation. According to the central bank, at least, effects will be limited. Though consumer demand is on the rise, the BSP is confident there will not be supply-side shortages that would lead to an inflation surge. While recent growth means that the demand for goods and services will be stronger, this should be offset by lower oil and commodity prices and a strong exchange rate, the BSP deputy governor, Diwa Guinigundo, told local media on May 29.

“It doesn’t necessarily mean that higher economic growth will lead to a very high inflation rate,” Guinigundo said, adding that he expected inflation to remain within the predicted 3.5-5.5% range this year.

On June 3, the BSP announced that it was holding its overnight borrowing rate at the record low level of 4%. The reserve said that “the prevailing inflation outlook supports keeping monetary settings unchanged”, despite the strong pick-up in consumer spending.

With the BSP keeping the flow of low-cost credit steady for the short term, the economy heating up and increased remittances from expatriate workers flowing in, Filipinos will likely be able to continue their shopping spree for the foreseeable future.

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