Weak Global Economy, Inflation to Undermine Growth in Philippines — ADB

MANILA - The Philippine economy will expand at a slower pace over the next two years, following its strongest surge in 30 years in 2007, the Asian Development Bank (ADB) says in a key report.

ADB’s flagship publication, Asian Development Outlook 2008 (ADO), released today, says the Philippines will grow at 6.0% this year, and then edge up to 6.2% in 2009. The Philippines posted a solid 7.3% growth in 2007 due to strong private consumption and an upturn in investment.

Private consumption will remain a major growth driver this year. However, higher food and fuel prices will force consumers to reduce their discretionary spending. The rapid rise in overseas remittances, which bolstered private consumption in 2007, is also expected to slacken as the global economic environment softens.

At the same time, the country’s merchandise exports are expected to be constrained by weaker global demand, especially for electronics goods, one of the Philippines’ biggest export products. Higher oil and food prices will increase import bills, as the Philippines is one of the world’s largest rice importers. Last year, remittances from Filipinos working abroad soared to $14.5 billion, translating into higher retail sales and increased housing construction.

“Net exports are expected to contract in 2008 and slow GDP growth,” the report says.

Inflation is forecast to accelerate to 4% in 2008 from 2.8% in 2007.

The Government is expected to raise infrastructure investment, mainly for transportation, power and water projects. Despite the huge budget allocation, the ratio of public investment to GDP still remains low at 2.8%.

Private investment in buildings is expected to expand, but investment in the manufacturing sector is likely to remain weak due to nagging problems in the domestic investment environment. Foreign direct investment, an important source of funding and technology for manufacturing, is low compared with countries such as Malaysia and Thailand. Manufacturing output growth is likely to ease to about 3% in view of the softer external demand.

Services sector growth is expected to dip by a little over 1 percentage point to 7.5% in 2008, as retailing and finance sectors slacken. The services sector accounted for about half of GDP in 2007. Agriculture production is likely to revert to its normal growth rate of about 4%, down from 5% in 2007.

The ADO warns that slippage in fiscal reform as the main domestic downside risk to the Philippine growth forecast. Last year, the share of tax revenues in GDP edged up to 14% from 12.4% in 2004.

“This momentum needs to be maintained if the Government is to sustain infrastructure spending and keep its budget from sliding back into deficit, with the associated pitfalls of a rising country risk premium, higher interest rates, and weaker currency,” the report says.

The ADO urged the government to work on the country’s persistent poverty problem, citing that the incidence of poverty had risen to 27.6 million people in 2006. Unemployment, insufficient increases in income, higher prices of oil and food, and a high population growth rate were among the major factors that affected poverty incidence.

“Further improvement in the fiscal position would enable an increase in social spending to address this issue and to build infrastructure that would help to attract employment-creating industries,” the report says.