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One more growth forecast downgrade

Posted on October 05, 2011

ANOTHER THINK TANK has downgraded its growth forecasts for the Philippines, which it described as “resilient, not immune” to global financial troubles.

The global economic outlook has grown dim in recent months with debt troubles plaguing Europe and the United States falling into a recessionary environment, GlobalSource Partners said in a quarterly report.

“This puts a heavy cloud over the Philippine economy and whose fortunes are still in some ways tied to these countries, and opens up another period of uncertain growth,” the study released yesterday states.

GlobalSource estimated gross domestic product (GDP) growth of only 4.3% this year and 4.8% next year, down from earlier forecasts of 4.8% and 5.5%, respectively.

Both projections are significantly below assumptions held by the government: 5-6% this year and 5.5-6.5% next year. The official “fighting” target of 7-8% remains in place despite lower-than-expected first half growth of 4%.

GlobalSource already trimmed its 2011 growth forecast for the Philippines last quarter from 5.3% amid surging commodity prices, supply chain disruptions brought about by the Japan disaster and the weakened purchasing power of dollar remittances as the peso appreciated.

“Based on first half performance, even this downscaled number has begun to look a bit optimistic, as it required the economy to grow upwards of 5.5% in the second half,” it explained.

The slowdown in many developed countries could dampen demand for Philippine exports and the stream of remittances from migrant Filipinos, the study said. The government may also “find it increasingly hard” to boost spending in the second semester, “having already missed the boat on infrastructure projects by failing to roll these out during the dry months.”

Government expenditures may remain “low or even stay negative” compared to last year’s spending levels, keeping the deficit to only P200 billion against the ceiling of P300 billion, GlobalSource said.

Public spending only amounted to P947.244 billion as of August, 8.12% down from a year earlier. As a result, the fiscal deficit totaled just P34.493 billion in the first eight months, a tenth of the full-year target.

Weak government spending, especially on infrastructure, will limit the country’s investment growth, GlobalSource warned.

Moreover, the slow-moving public-private partnership (PPP) program could further stall the country’s much-needed infrastructure boost, as another round of reviews is conducted on feasibility studies and financing terms.

“With government’s housecleaning efforts beginning to dilute investor interest rather than promote it, in the short run at least, we are doubtful PPP projects would be able to take off anytime soon,” the report read.

A new PPP scheme proposed by the Transportation department last week could also add to the delay, as the government would have to tap development loans to build hard infrastructure before bidding out other services to the private sector.

“This approach ... may be even harder and take longer to pull off as it introduces another layer of complexity in reconciling policies and procedural requirements of government, official funders, and private investors,” GlobalSource pointed out.

On the upside, though, inflation has abated and remittances have remained steady despite the market turmoil abroad. The fiscal space created by the spending compression also leaves room for the government to pump-prime the economy later.

The economy also enjoys robust domestic demand, historically high foreign exchange reserves, a healthy banking sector and a strong balance sheet. This is affirmed by the recent string of credit rating upgrades and the jump in world competitiveness rankings, GlobalSource said.

Despite the dimmer growth prospects, it said the economy’s strong fundamentals could help it pull through the brewing global slowdown.

“In the worst case where European debt troubles coupled by US weakness lead to another global financial crisis of the same scale as 2008, the Philippines could remain as resilient to recession and financial volatility as it had been back then,” the report states.

GlobalSource also welcomed the moves in Congress to amend the Philippine constitution as it would open up more economic activity to foreign investors.

The push for constitutional reform is timely as President Benigno S. C. Aquino III’s trust rating is high and there is “little yet to fuel the suspicion” that he is seeking a longer stay in the Palace, it said.