Philippines: The economy has recovered, allowing the BSP to raise interest rates next week.

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1Q GDP outperforms expectations.

Despite an Omicron-induced surge in Covid infections early in the quarter, economic activity remained robust in 1Q22. Economic re-opening as mobility restrictions were lifted aided GDP growth to 8.3 percent year on year, returning it to pre-Covid levels.

Private consumption increased by 10.1 percent year on year, with strong growth in transportation and recreation sectors. Capital formation also grew rapidly, increasing by 20%. Due to increased construction spending, fixed capital formation increased by 11%. Government spending was also up, albeit at a slower pace of 3.6 percent year on year.

PHL GDP returns to pre-Covid levels after growing 8.3 percent in the first quarter.

The ball is in the hands of the BSP; expect a rate hike next week.

This robust economic recovery, combined with above-target inflation, suggests that the Bangko Sentral ng Pilipinas' policy will be normalized (BSP). To aid the economic recovery, BSP Governor Diokno has kept interest rates unchanged. However, with GDP now back to pre-Covid levels and inflation picking up, we fully expect the BSP to raise policy rates at its 19 May meeting next week.

The next leader inherits a strong economy but many challenges.

Although the Commission on Elections has yet to declare a winner in the recent Presidential Election, unofficial election results indicate that Ferdinand Marcos Jr. was victorious. The next president will inherit a strong economy, as 2Q GDP growth will almost certainly show another healthy expansion driven by election-related spending. In addition to a strong economy, Marcos will begin his term with significant political capital, as his senate is expected to secure 11 of the upper house's 12 seats. A majority mandate, combined with significant political capital, opens the door for Marcos to implement significant economic reforms early in his single 6-year term.

The investor community is now waiting for Marcos' cabinet picks, particularly the composition of his economic team and his plans for dealing with key issues such as accelerating inflation and debt consolidation - Marcos inherits a sizable amount of debt from his predecessor.

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