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Subdued Exports and Investment Weaken Philippine Growth Prospects

MANILA, PHILIPPINES (8 September 2005) - Hurt by a global electronics downturn, weak farm output, and tepid investment, the Philippine growth forecast for 2005 has been trimmed by the Asian Development Bank (ADB), in its Asian Development Outlook 2005 Update (Update) released today.

The Update - a supplemental publication of ADB's flagship economic report Asian Development Outlook 2005 (ADO 2005) issued in April - has revised down the projected 2005 growth in the Philippines gross domestic product to 4.7% from 5%. The growth forecast for 2006 has been lowered slightly to 4.8%, also from 5%.

Drought early this year reduced agricultural output. Electronic exports, which account for more than half the country's merchandise exports, rose by only 0.3% in the first six months. Moreover, capital formation, or investment, contracted by 5.5% during the first half.

"Investment is likely to remain weak through 2006, and the constrained budget position effectively rules out any major fiscal stimulus," the Update points out. However, remittances from overseas Filipino workers will continue to aid consumption, and an expected upturn in the global electronics cycle will help industrial production and exports next year. In 2007, growth is expected to pick up to 5%, provided that the global economy expands as projected and weather conditions in the Philippines allow a sustained recovery in agricultural output.

The report warns that "forecasts on the Philippines are subject to a greater than usual degree of uncertainty, given the impact that rising global oil prices have on the economy, disruptions to the tax legislation and political uncertainty."

Increase in food prices due to the drought and rising fuel prices have pushed inflation up this year. The Update revises up the forecast for inflation by one percentage point for each year, to 7.5% in 2005 and 7.0% for 2006.

The fiscal deficit for the first seven months of 2005 was narrower than targeted, and the primary surplus (excluding interest expenses) increased by 83%. However, the Update notes the outcomes relied on compression of development expenditures and a large windfall of interest income for the Bureau of the Treasury. Despite the focus on the need for enhanced tax revenue, the Bureau of Internal Revenue and Bureau of Customs both fell behind their collection targets for the first seven months, by 3.6% and 7.8%, respectively.

"Fiscal consolidation is the overriding economic policy challenge, and perhaps the most important proxy for assessing confidence in economic management and prospects," the Update says.

"The fiscal deficits and large stock of government debt, of which nonfinancial public sector debt had grown from 84% of GDP in 1999 to just over 100% of GDP by end-2004, leaves the economy highly vulnerable to changes in investor's views. Any fiscal slippage could attract credit downgrades and higher debt service costs," it warns.

The Asian Development Bank is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 63 members, with 45 from the region. In 2004, it approved loans and technical assistance totaling $5.3 billion and $196.6 million, respectively.

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