WB upgrades RP growth outlook to 5.5% this year

The World Bank revised its 2006 growth forecast for the Philippines to 5.5 percent from 5.3 percent, citing recovery in the agriculture sector, steady export growth and strong remittances from overseas Filipino workers.

In its latest twice-yearly growth outlook on East Asia, the bank also upgraded its 2007 gross domestic product (GDP) forecast to 5.7 percent from 5.6 percent, pointing out that the Philippines can withstand a possible slowdown in the US economy.

The WB’s forecasts are at the lower end of the Philippine government’s target range of 5.5 to 6.1 percent for this year and 5.7 to 6.5 percent for 2007.

The bank noted that favorable weather helped increased farm output by over five percent in the first half of the year and a rebound in electronics exports pushed overall export growth to 17.5 percent.

Economic growth was also aided by a rise in consumer spending, strong remittances, lower interest rates, tamer inflation, stronger foreign direct investment, and tax revenue efforts.

"Relative to other countries in the region, things are moving on pretty well for the Philippines," said Sanjay Dhar, WB’s lead economist for the Philippines.

"Its growth is not a typical pattern but can be sustainable," especially if the government keeps in mind its fiscal targets, he said.

He said that if the economy sustains five to six percent growth, spare capacity will increase and investments will pick up starting next year.

"Government expenditure can expand in real terms in relation to GDP especially with falling interest rates and as more foreign private fund agencies are willing to lend at lower spreads."

Dhar said even with the prospect of a US economic slowdown which will consequently hit exports from the region, countries like the Philippines would still be able to cushion its impact, with domestic consumption and investments supporting growth.

"Private investment would also start to pick up once it recognizes the extent of the fiscal adjustment that has occurred," Dahr said.

Among the fiscal adjustments initiated by the National Government are the expanded value-added tax (E-VAT) and the crackdown on tax evasion.

"If growth continues at the five to six percent level, capacity utilization would start to increase and companies would need to invest more and so investment would start to pick up beginning next year," Dahr noted.

Companies would have to expand their operations in order to meet the increasing demand of a growing economy like the Philippines.

Aside from private investments, Dahr said that there could also be an upsurge of public spending specifically on infrastructure projects.

"The fiscal adjustments that have occurred give the government some more room for public investment in infrastructure and social services so that would provide a demand counterpoint," Dahr noted.

In the past, Dahr said the government’s huge public debt has hindered it from spending on infrastructure projects.

"It is clear that infrastructure in the Philippines is not as developed as in the richer countries of the region," he said.

"We feel that as this process takes effect and adjustment becomes credible and investment in infrastructure becomes credible, private investment will begin to pick up," the WB economist explained.

There is also the boost from cheaper fuel costs with the WB estimating that oil prices will likely stabilize to $60 per barrel in 2007 from $65 this year.

One of the major challenges in 2007 for the Philippines, Dhar said, would be for the government not to lose sight of its fiscal targets, especially with national elections in May likely to increase public spending.

At the same time, tax reform efforts should continue while structural impediments to investments should be addressed, the WB said. – AFP, Ma. Elisa P. Osorio