MANILA (Reuters) - The Philippines matched China's expansion in the second quarter, becoming the two fastest growing economies in Asia, as strong fundamentals, domestic spending and investments buttressed the Southeast Asian nation from regional fund outflows.
Its solid growth performance lifted the peso from nearly 3-year lows and the stock market .PSI from 9-month lows, and better positions the Philippines to keep its favored status among investors amid market volatility.
The country has overtaken Southeast Asian neighbors such as Indonesia as a safer investment bet due to prudent management of fiscal and monetary policy. It secured investment grade from two ratings agencies this year.
But analysts warned that delays in public infrastructure projects could create uncertainty that might stall investments going forward as it seeks investors to bankroll construction of pivotal roads to railways.
Recent fund outflows from emerging markets due to Fed tapering fears may also lead to destabilizing capital flows in the economy, said Bernard Aw, analyst at Forecast PTE Ltd in Singapore. But most analysts say the country's strong current account, adequate forex reserves and lower export dependence differentiates it from its regional peers.
The economy grew an annual 7.5 percent in the second quarter, above a 7.3 percent market estimate, and compared with a revised 7.7 percent growth in the first quarter.
From the previous three months, GDP rose 1.4 percent in the second quarter, higher than the 0.8 percent forecast in a Reuters poll. It was the slowest pace in a year and below the upwardly revised growth of 2.3 percent in the March quarter.
Analysts expect the central bank to keep the policy rate on hold at a record low level of 3.5 percent after the data.
The Philippines has managed to sustain annual growth of above 7 percent for four quarters in a row, defying a slowdown in the region as it presses on with reforms.
"The composition of our growth shows signs of an economy that is in the process of rebalancing, moving from being largely consumption-driven to becoming investment-led and industrialized, with the ability to provide higher quality jobs for Filipinos," Socioeconomic Planning Secretary Arsenio Balisacan told a media briefing.
"This internal dynamism indicates greater consumer and business confidence in the domestic economy, as we have continued to keep our macroeconomic fundamentals in check."
The Philippines is on course to outperform its GDP growth target this year of 6-7 percent and its strong fundamentals will allow it to manage risks coming from market volatilities and global headwinds, he added.
Capital formation and public spending, up 13.2 percent and 17 percent from a year ago, have been growing faster than household consumption, up 5.2 percent, in the last three quarters. Growth in household spending has remained at single-digit levels since at least the first quarter of 2011.
The government is hopeful continued strong growth will substantially lower poverty levels. The number of poor are estimated at more than a fourth of its 97 million population.
Like many of its regional neighbors, the Philippines has not been immune to the global downturn or fund outflows as the U.S. Federal Reserve starts winding down monetary stimulus.
The peso is down nearly 8 percent this year. Exports and imports fell more than 4 percent in the first half of the year.
But with a tenth of the Philippine population abroad and sending an average $1.7 billion in remittances every month, domestic demand in the country has remained solid, helping cushion the economy from slumping trade.
Higher state spending related to the mid-year elections in May also boosted domestic consumption, economists said, while manageable inflation allowed policymakers to keep interest rates at record low levels, supporting growth.
Public construction jumped 31 percent in the second quarter, lower than the previous quarter's 45.6 percent annual gain, but faster than private construction growth at 9 percent.
A challenge for one of Asia's top performers is to keep policy sufficiently supportive to protect the domestic economy from weak external demand in the second half.
"Government spending may slow post-election, with some concerns that the ongoing case on the abuse of a discretionary fund may curb state expenditure," said Aw of Forecast.
Bangko Sentral ng Pilipinas Governor Amando Tetangco said the latest data should help boost investor confidence, and support the peso and the local stock market. He added that the authorities will ensure monetary policy supports non-inflationary robust growth.
Additional reporting by Erik dela Cruz; Editing by Rosemarie Francisco and Jacqueline Wong