"Philippines Country Risk Report Q2 2016" Published

*Real GDP growth in the Philippines accelerated from 5.8% y-o-y in Q215 to 6.0% in Q315, as strong domestic demand more than offset export weakness. Domestic resilience should persist, informing our expectations for the Philippine economy to remain on a sound footing despite growing external challenges. Accordingly, we are forecasting real GDP growth to come in at 5.7% and 6.0% in 2015 and 2016, respectively.

*Following the decision by the Bangko Sentral ng Pilipinas (BSP) to keep its benchmark interest rate unchanged at 4.00% at its December monetary policy meeting, we are forecasting the central bank to stand pat over the course of 2016, as the Philippine economy should remain in a growth-inflation sweet spot. That said, potential economic risks stemming from a worsening of the external environment and upcoming elections, as well as inflation risks arising from prolonged El Nino, could lead to monetary adjustments.

Full Report Details at
- http://www.fastmr.com/prod/1118938_philippines_country_risk.aspx?afid=301

*The prospects for capital gains in the Philippine fixed income market will be limited in the months ahead owing to sustained nominal GDP growth without the need for interest rate cuts, the potential for inflation to rise due to prolonged El Nino, and the likely normalisation of US monetary policy. While yields will rise, we expect Philippine bonds to be less vulnerable than regional peers such as Indonesia to a Fed liftoff, owing to the country's improving fiscal and external positions.

*The Philippine peso is facing growing downside risks amid a precarious equity market, which has begun to underperform after years of outperformance and could signal headwinds facing the broader economy. That said, a solid current account surplus and high real interest rates should provide some support. As such, we maintain our forecast for the Philippine peso to end 2015 at USD47.27/USD before depreciating towards our end-2016 target of PHP48.23/USD.

Major Forecast Changes

*We have revised our forecast for the BSP to keep its benchmark interest rate unchanged at 4.00% through 2016, versus a 25bps hike previously.

Key Risks To Outlook

*The Philippines remains at risk of substantial hot money outflows in the event of acute global credit or financial market stresses.

*Growth slowdowns in both China and Japan, to which the Philippines is heavily exposed in both investment and trade terms, could undermine the country's strong domestic growth story.

*The largest risk to our medium-term peso view comes from the potential for a further devaluation in the Chinese yuan by the People's Bank of China (PBOC) so as to support China's economy. A weaker yuan could see the BSP allow for a further weakening of the peso in order to maintain the competitiveness of Philippine exports relative to Chinese exports.

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