Stronger Farm, Export Growth Boost Philippine Outlook

MANILA, PHILIPPINES - The Philippine economy will grow 5.4% in 2006 supported by the strong performance of the agricultural sector and exports, according to a major ADB report released today. The forecast is up from 5% growth anticipated in April. The outlook for 2007 growth is unchanged at 5.3%.

“The economy is benefiting from the strong harvest and a healthy rebound in exports,” said Mr. Ifzal Ali, ADB Chief Economist, at the launch of Asian Development Outlook 2006 Update.

“The Government is making good progress at getting its fiscal house in order and will need to focus on establishing an environment that attracts more investment and creates more jobs to ensure consistent growth going forward,” he said.

ADO Update forecasts overall growth for the 43 countries of developing Asia of 7.7% in 2006, up from 7.2% forecast in April.

The end to a drought induced by the El Nino weather phenomenon last year has led to a sharp increase in agricultural production in the Philippines. A rebound in exports has also provided strong support to the economy, ADO Update notes. Merchandise exports rose about 17% in the first half of the year.

Consumer spending has been solid, buttressed by continued strong inflows of remittances from overseas workers - equivalent to about 12% of GDP - a modest improvement in labor market indicators, and higher farm incomes. Fixed investment, however, remains weak.

A slower rise in food prices has contributed to a slight moderation in inflation this year. ADO Update projects lower inflation next year as stability returns to world fuel prices and the effect of the value-added tax (VAT) increase earlier this year fades. Consumer price inflation is projected to average 6.7% this year and 6% in 2007.

The stronger than expected growth of exports has led to an upward revision of the forecast current account surplus to 2.9% of GDP for 2006, rising to 3.1% in 2007. This is about one percentage point higher than in the April forecast.

ADO Update notes the significant progress made by the Government on fiscal consolidation. Revenues rose 21% year-on year in the first half, while non-interest outlays were 9% below target. This implies some room for higher spending on social and physical infrastructure without jeopardizing the objective of fiscal consolidation, according to ADO Update.

However, the government’s debt burden is still high. “Interest payments on the debt still consume more than a third of government income, so a sustained increase in tax collection will be needed to finance necessary development expenditure over the medium term,” says ADO Update.

Increasing investment and creating sufficient employment opportunities are key medium-term challenges. Investment as a share of GDP fell to about 15% in 2005 from 18.8% in 1999. Job creation remains well below the government’s annual target of 1.5 million new jobs.

ADO Update underscores the importance of continued fiscal consolidation and higher development spending to reverse the decline in the investment rate and improve the prospects for higher growth in output and employment over the medium-term.

A sustained improvement in the financial performance of government-owned or government-controlled corporations is also necessary to preserve the gains in the public sector’s financial position. Significant privatization of power sector assets, which has been on the drawing board for some time, could be a powerful catalyst for improving investor sentiment, according to ADO Update.

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