MANILA, PHILIPPINES - Increased public spending, investment, and private consumption will lift growth in the Philippines over the next two years, but long-standing structural weaknesses remain an obstacle to reaching the government's 7-8% growth target, the Asian Development Bank (ADB) says in a major new report.
ADB's flagship annual economic publication, Asian Development Outlook 2012 (ADO 2012), released today, says gross domestic product (GDP) growth for the country is estimated to recover to 4.8% in 2012 and 5.0% in 2013, after posting a lackluster 3.7% in 2011.
"Remittances and lower inflation will sustain private consumption, and strong business sentiment will continue to support private investment. A pickup in public investment and accommodative monetary policy will also aid the Philippine economy," said Neeraj Jain, ADB's Country Director for the Philippines. "However, issues like poor infrastructure and weak governance must be tackled if the country's economic gains are to benefit all."
In 2011 the economy was hit by a slump due to a drop in its key electronics exports and restrained government spending. But the picture looks brighter for 2012 as the government steps up social sector spending, and moves ahead with planned public-private partnerships to build badly needed infrastructure. An increase in household consumption, fuelled by a rise in remittances from overseas workers and accommodative monetary policy will also underpin growth, with sovereign rating upgrades and better business sentiment expected to boost investment.
The drag on growth from exports is likely to diminish with a modest rebound of about 5% in merchandise exports seen in 2012, although Europe's troubles and softer growth in the People's Republic of China will temper gains. Imports will pick up as consumer demand and investment rise, while services will be the main growth contributor as the country's booming business process outsourcing industry keeps expanding. Inflation in 2012 is set to dip slightly to an estimated 3.7% on the assumption of broadly stable global commodity prices, while the peso is seen little changed against the US dollar.
"More favorable global economic conditions and headway on infrastructure will underpin a further uptick in growth in 2013, but the government will need a sizable increase in new revenue if it is to meet its goal of trimming the budget deficit to 2.0% of GDP next year," said ADB Chief Economist Changyong Rhee.
While the immediate picture looks rosier, slow progress on key Millennium Development Goals, rising income inequality, an over-reliance on electronics exports and remittances, and industrial stagnation remain as drags on the economy. The failure of industry to move up the value chain because of weak infrastructure and a cumbersome business environment has limited the creation of higher paying jobs needed to reduce poverty.
To overcome these obstacles, policymakers must accelerate efforts to improve the country's infrastructure, as well as the governance and business environment, ADO 2012 says. This could include policy reforms to create the right incentives and selectively targeted government support to boost output of value-added goods, and to increase the number of high-productivity, high-wage jobs.