Infra projects, policy reforms ramp up Philippines growth estimates

By Riza Lozada

Analysts and economists continue to up­grade their assessments on the country as a result of determined moves of the Duterte administration to institute policy reforms, particularly in doing away with red tape.

Nomura Securities economist Euben Perecuelles said the Philippines is growing fast and has a better growth profile than Vietnam or Indonesia.

Nomura, in its latest assessment on the country, projects economic growth at 6.7 percent this year, 6.3 percent next year and 6.5 percent in 2018.

The Oxford Business Group (OBG), in a review issued last week said “solid gains by the Philippines manufacturing industry are set to continue through the remainder of the year, but increased investment will be needed to boost production in the long term.”

The OBG review cited a World Bank (WB) report titled, “Philippines Month­ly Economic Developments,” stating the need to import capital goods as the “man­ufacturing sector is approaching the up­per limits of its production capacity, with plants operating at a utilization rate of 84 percent.”

The WB believes that capacity utili­zation “hardly changed in the past four years” despite showing a 10.1-percent surge in the Volume of Production Index for total manufacturing in July, compared to a 0.1-percent growth for the same month in 2015.

“We expect the Duterte government to make more progress on infrastructure spending than its prede­cessor, and boost reforms, particularly by cutting red tape and implementing com­prehensive fiscal changes despite the current political noise,” Perecuelles said.

The Philippines is con­sidered a rising star in Asia which has not yet reached its full potential.

Its investment accounts for only 6.7 percent of its to­tal gross domestic product (GDP). By comparison, during their boom years, China spent 10 percent of its GDP on investment (1999-2011), while Japan spent 8.1 percent (1965-74), according to Nomura.

With higher investment spending, though, the Philippines economy can grow at up to 7 percent a year.

“We assume investment ratios increase to an average of 33 percent of GDP from an estimated 28.3 percent in 2016, re­flecting in part the government’s plan to increase infrastructure spending to 7 percent of GDP over the medium term, up from 5 percent during the Aquino administration,” Nomura said in its review.

“We do not expect the government to reach this target in the next two to three years, but see a sustained increase to between 5 percent and 6 percent over that period as a more realistic scenario,” it noted.

“However, if the government can boost infrastructure spending further to the officially projected 7 percent and, in the process, encourage even more private sector participation, an ‘accelerated reform’ scenario in which investment rates rise by another 4 to 5 percentage points to around 37 percent would imply an increase in potential growth to 7.5 percent, on par with (if not better than) the potential growth of larger econo­mies in the region such China and India,” it added.

During President Duterte‘s recent state visit to China, Bei­jing offered to invest $3 billion in infrastructure projects through its state-owned China Railway Group.

“A $1-billion increase in infrastructure spending can boost the Philippines economy by up to 0.8 percent,” Nomura said, citing estimates of investment bank Citi.

The Philippines is looking even better than Vietnam and Indonesia, in part because its working age of from 25 to 64 years accounts for a higher proportion of the general popula­tion than its peers.

The Philippines also has over 100 million people, the 12th most populous country in the world, it added.

The Oxford Business Group, however, warned that unless businesses actively invest in expanding production capacities, capacity constraints may limit growth prospects in the near future.

In July, imports of capital goods, which accounted for one-third of inbound shipments by value for the month, rose by 23.1 percent, compared to a year ago and were up 53.8 percent year-to-date, reflecting increased investment in the sector, according to the OBG.

The Bangko Sentral ng Pilipinas (BSP), the OBG report said, viewed the rise in capital goods imports both for domes­tic consumption and for infrastructure could result to “narrow­ing of the trade surplus over the next two years.”

The OBG also noted that the exports of manufactured products fell by 13 percent in July from a year ago, with the leading electronics export commodity accounting for 51.4 per­cent of all earnings for the month, down 14.8 percent year-on-year to $2.4 billion.

Other segments to post significant retreats were machin­ery and transport equipment, falling 36.8 percent, and wood­crafts and furniture, which declined by 24.2 percent.

Despite a risk of weaker-than-expected demand from the country’s major overseas markets amid softer global econom­ic activity, domestic demand is expected to drive growth for the rest of this year, according to the Asian Development Bank (ADB).

In the first half, the local economy expanded by 6.9 per­cent, in part due to a surge in domestic consumption and elec­tion-related spending, with the ADB revising its GDP growth prediction for the year to 6.4 percent as of September.