Philippines' Growth Rate to Slide in 2009, Begin Recovery in 2010

HONG KONG, CHINA - The Philippine economy is likely to decelerate this year, before picking up slightly in 2010, as weak global demand for the country's goods and services slows down consumption and investment, the Asian Development Bank (ADB) says in a new major report.

ADB's flagship annual economic publication, Asian Development Outlook 2009 (ADO 2009), released today, predicts the country's economy is likely to expand by 2.5% this year – down from 4.6% in 2008 and 7.2% in 2007. It forecasts that the economy will recover slightly to 3.5% in 2010, assuming that the global economy and trade pick up late next year.

"Similar to other countries in Southeast Asia, the near-term challenges for the Philippines are twofold: safeguarding the achievements of recent years – among them stronger growth momentum and progress in fiscal management – and protecting the most vulnerable groups in society at risk during the slowdown," says ADB Acting Chief Economist Jong-Wha Lee.

Domestic consumption is projected to grow by just 3%, as remittances from overseas Filipino workers stagnate in US dollar terms on the back of a weak global labor market. The number of workers going abroad last year rose until November on a year-on-year basis, but fell by 5.8% in December. In addition, the local labor market is also bleak as export industries trim their workforce and more laid-off overseas workers return home.

Domestic and foreign private investment is expected to remain sluggish this year because of the weak demand for exports and the global credit squeeze.

On the other hand, public spending on infrastructure and social welfare projects is expected to pick up the slack in economic activities, supported by the government's US$6.9 billion (330-billion-peso) economic stimulus package.

As a result, fiscal spending is projected to rise substantially, with the budget deficit widening to about 2.5% of GDP. The report warns that further fiscal slippage beyond this level could unsettle financial markets and rating agencies, raising borrowing costs for the country.

"Further increases in revenue as a share of GDP and reductions in debt would not only reduce vulnerabilities, but also build the fiscal resources required for development spending on infrastructure and on social programs," says Dr. Lee.

Average inflation is set to moderate to 4.5% this year – down from an average of 9.3% in 2008 – as a result of the economic slowdown and lower prices for imported oil and food. This could pave the way for further easing in monetary policy to support growth.

Domestic risks to the outlook include delays to the economic stimulus package and capacity constraints that could hamper implementation of stimulus-related projects.

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