Strong domestic demand buffeting growt

MANILA, Philippines - Goldman Sachs said the Philippines'  forecast- beating economic growth in the first quarter confirms that the recovery process is firmly underway, and expects growth to be sustained in subsequent quarters.

"We expect expect it to continue to get support from the two engines of flows—stable remittances and growing IT service exports," the investment bank said in its research notes on Thursday.

"We expect gross domestic product (GDP) to grow 4.2% year on year in 2010, higher than the 1.1% year on year growth in 2009. Our forecast is above the consensus of 3.9%," the US investment bank said.

The Philippine government on Thursday announced that first-quarter GDP grew 7.3% from a year earlier, helped largely by election spending and increased remittances from overseas Filipino workers.

Goldman Sachs said that at 11% of GDP, remittances have been consistently supporting private consumption.

"Robust overseas remittances are likely to result in further upticks in private consumption over the next few quarters. Our outlook remains robust."

Goldman Sachs said the country's economy will also be boosted in the coming quarters by IT service exports, which are rapidly gaining prominence.

"They have grown at a compound annual growth rate of over 40% since 2004, and could potentially outpace remittance inflows in a few years."

It added that robust flows and strong business sentiment will further get a boost from a likely decisive election result.

"These are likely to support growth in 2010 despite a weak, El Niño-affected agricultural crop."

Given the strong showing of the economy in the first quarter, Goldman Sachs expects the central bank or the Bangko Sentral ng Pilipinas to be pre-emptive and start raising interest rates in the third quarter.

"Favorable flows and our expectation of the central bank raising rates are likely to be supportive of the Philippine peso  over the medium term."

It said that in the past, smooth and successful elections have supported the peso through improved sentiments.