Philippines to Maintain Modest Growth of 5.4% in 2007

MANILA, PHILIPPINES - The Philippines is expected to maintain modest economic growth, with GDP rising 5.4% this year and 5.7% in 2008, the Asian Development Outlook (ADO) reports.

Government spending is expected to increase to 17.9% of gross domestic product (GDP), up from 17.3% in 2006 – the first pickup in its share of GDP in five years. Outlays on public works, transport and communications, and to a lesser extent, education, are budgeted to rise 16.4%.

Boosted by higher public expenditure and low real interest rates, growth of investment is likely to rebound to 4% to 6%, up from 2% in 2006. The average annual increase in investment was just 0.4% from 2002 to 2006.

The services sector will remain the major growth contributor on the supply side, expanding by 6.3% in 2007. Agricultural production is likely to grow by 3.9%. The Biofuel Act, instituted in January, will boost cultivation of sugarcane and cassava for ethanol production. Construction will benefit from the planned upturn in public spending on infrastructure.

An anticipated slowdown in the global electronics market will dampen manufacturing, holding industrial growth to 4.8%.

Inflation is likely to remain within the target range of 4% to 5%, affording scope for monetary policy accommodation.

The country’s fiscal deficit has narrowed significantly due to a rise in the value-added tax rate and an expansion of the tax base.

While robust remittances, low real interest rates and higher government expenditure will keep the economy firmly on the growth track, it is unlikely to be strong enough to lift employment if investment remains weak, ADO 2007 says.

The Philippines needs to move to a higher growth trajectory and create more and higher-quality jobs for the rising numbers of unemployed, underemployed, and new entrants in the labor force. In 2006, unemployment remained close to 8%, with slightly more than half being high-school and college graduates. In a worrisome trend, the number of underemployed rose to 23% of total employment in 2006, up from 18% in 2004.

Investments in infrastructure and health also need to be increased. Greater private sector participation is contingent on an improved business and investment climate.

The report added that the main risks to these projections are a slowdown in external markets and the potential impact of national elections in May 2007.

“The election needs to be transparent and peaceful and the fiscal and structural reforms kept on track,” the report says. “If reforms related to better tax collection and privatization stall, the country risk premium is likely to rise, with an adverse impact on capital inflows, the exchange rate, and interest rates, reversing some of the gains made in recent years and dimming the outlook for future growth.”

The ADO 2007 is ADB’s flagship economic publication. It includes comprehensive economic analysis and forecasts of more than 40 economies in developing Asia and the Pacific, and examines medium-term trends and prospects by subregion – East Asia, Southeast Asia, South Asia, Central Asia, and the Pacific.

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