The Market Monitor Minding the Nation's Business
By Luis Leoncio
Notwithstanding the supposed ill-effects of the incendiary “anti-American” rhetoric of President Duterte, which some quarters promptly blamed for the weakening of the stock market and the local currency, the World Bank (WB) said in a report that the Philippines has emerged as one of the most dynamic economies in East Asia in the first half.
The WB attributed the bright prospects of the economy to the Duterte administration’s assurance to investors of continuity of economic policies.
The economic outlook is optimistic, with risks tilted to the upside, the WB said in its report on the Philippines, titled “Outperforming the Region and Managing the Transition.”
The report noted that enhancing the inclusiveness of growth is a priority of the new administration of Mr. Duterte.
“The Philippines remains one of fastest-growing economies in East Asia and the Pacific despite the weak global economy. The country’s gross domestic product(GDP) is forecast to grow 6.4 percent this year and 6.2 percent in the next two years,” the report said.
It added that the economy may surpass the growth forecasts, if the administration could further ramp up spending on public infrastructure, as planned.
“In 2017, 40 percent of the planned government spending on infrastructure will be for roads, railways, seaports and airports. This can boost a large segment of the economy including industrial activities, real estate, construction, and tourism,” the report said.
World Bank Lead Economist Birgit Hansl said that domestic consumption will also continue to prop up the local economy, driven by rising purchases from an expanding middle-class, remittances from overseas Filipino workers (OFWs), and the expansion of jobs as a result of the growing economy.
“Upon assuming office, the new government reassured investors and the private sector with continuity of existing macroeconomic policies including fiscal, monetary and trade policies that would support continued economic expansion and poverty reduction,” Hansl said.
He added that many reforms are being unveiled, specifically on tax policy and administration, the tracking of government spending, security of land tenure, ease of doing business, and restrictions on foreign participation.
“But as policy details are still being discussed, some businesses might remain cautious. The completion of the new Philippine Development Plan this year will provide more clarity on the government’s development priorities and further improve the country’s growth prospects,” he added.
World Bank Country Director Mara Warwick said macroeconomic stability puts the Philippines in a good position to accelerate inclusive growth that benefits all Filipinos.
“Poverty will decline faster if the returns from economic expansion are invested in building human capital by strengthening health, education, and social protection,” said Warwick.
“Currently, the poor are concentrated in the agriculture sector, where increases in productivity would generate higher incomes for rural dwellers.
Achieving this will require a comprehensive rural development strategy, which is among the priorities of the current administration,” she added.
The report noted that as economic growth is sustained, and as spending on health, education, and social protection expands, extreme poverty is projected to decline from 10.6 percent in 2012 to 7.8 percent in 2016, 7.2 percent in 2017, and 6.7 percent in 2018.
Among the report’s forecasts were:
■ The services sector, which includes the country’s business process outsourcing (BPO) industry – will remain a key growth driver, projected to grow at 7.0 percent in 2016, and 6.8 percent in 2017-2018.
■ With plants and factories operating at almost full capacity (83-84 percent), expansion in the manufacturing sector would require fresh investments in new equipment, machinery, and factories.
■ In the agriculture sector, increasing farm productivity would be important for improving its growth prospects that would lead to more inclusive growth.
Despite a challenging global economic environment, the Philippine economy has grown at a rapid pace over the past five years, supported by sound macroeconomic fundamentals and a highly competitive workforce, the report noted.
Strong capital investment and robust domestic demand have helped secure the Philippines’ position as the leading growth performer among major economies in East Asia and the Pacific, it added.
“GDP growth rate rose from 5.5 percent in the first half of 2015 to 6.9 percent in the first half of 2016, enabling the Philippines to outperform regional peers such as China, Indonesia, Malaysia, Thailand, and Vietnam,” it added.
“The Duterte administration took office on June 30th after winning a peaceful democratic election marked by record voter turnout,” the report said.
It noted that the previous administration made major achievements in securing macroeconomic stability, promoting public sector transparency and focusing fiscal resources on pro-poor infrastructure projects and social services.
It said the new president’s economic team has prepared a 10-point socioeconomic agenda designed to reinforce private sector confidence in the continuity of the existing macroeconomic framework.
“The preliminary agenda is intended to bolster the government’s current fiscal, monetary and trade policy stances, while prioritizing tax administration reforms,” it added.
The report said the economic outlook is optimistic, with risks tilted to the upside.
“Over the near term, the Philippines is poised to benefit from the completion of several large public infrastructure projects, which are expected to boost private investment,” it said.
The report added that improved infrastructure, solid remittance inflows and significant social spending should continue to support the growth of household consumption.
“If remaining budget-execution bottlenecks are successfully addressed in the next few months, and if uncertainties regarding the specifics of the reform agenda are quickly resolved, the annual GDP growth rate could exceed the 6.2 percent currently projected for 2017 to 2018,” it added.
“While the near-term outlook is highly positive, the Philippines’s growth model is subject to medium-term risks,” it said.
It listed such risks as the continued failure of external demand to meet expectations and a decrease in remittance inflows, and potentially higher interest rates in the US and EU.
“On the domestic front, medium-term risks include the persistent vulnerability of the agricultural sector, as well as unresolved constraints on private investment, and a lack of competition in major sectors and structural deficiencies in the business environment,” it said.
Ensuring that growth is inclusive will continue to pose a major cross-cutting challenge to Philippine policymakers, ne that is likely to intensify as the country’s evolving economy increasingly shifts to more skill- and capital-intensive forms of production, the report said.
“The Philippines has made some progress in its fight against extreme poverty. As the Philippine economy continues to develop, the challenge of ensuring inclusive growth will become more complex, and investment in human capital will be necessary to ensure that the nation’s workforce is able to meet a rising demand for skilled labor,” the report added.
It said, however, that the new administration is committed to continued investment in education, job skills, public health and social assistance in order to promote a transformative and inclusive growth pattern.
“The government is currently engaged in a process of stakeholder consultation as it develops the next six-year Philippine Development Plan, which is expected to provide guidance on both short- and medium-term policy priorities for achieving this ambitious goal,” it added.