By Elijah Joseph C. Tubayan
THE WORLD BANK has downgraded its 2018 economic growth forecast for the Philippines — making it the third multilateral lender to do so since last week due to heightened external uncertainties and surging inflation locally — but overall prospects should remain “strong” enough for it to maintain the country’s projections for 2019-2020.
In its bi-annual Philippines Economic Update published yesterday, the Washington-based multilateral lender said it expects Philippine gross domestic product (GDP) to grow 6.5% this year, down from a 6.7% April projection and 2017’s actual 6.7%. At the same time, the World Bank kept its 2019 and 2020 forecasts at 6.7% and 6.6%, respectively.
“The Philippines’ medium-term growth outlook remains strong, supported by an expected rise in public investment spending and a robust private demand,” the report read, noting that consumption is supported by a “steady” labor market, continuous remittance inflows and “inflation easing,” following Palace administrative orders to boost food supply and speed up distribution.
World Bank Senior Economist Rong Qian, in a media briefing on Thursday at the bank’s Philippine office in Taguig City, said that the latest projection took into account the slower-than-expected six-percent growth in the second quarter that compared to 6.6% in the same period last year and last January-March, due to weak exports and weak farm performance.
The same report shows the World Bank expects growth to accelerate this semester and into next year despite high inflation, as election-related spending kicks in. “GDP growth is expected to accelerate in the second half of 2018 and in early 2019, boosted by upcoming senatorial and local preelection spending and continued strong public investment growth. This is consistent with the government’s plan to speed up the implementation of its infrastructure program. Investment spending is expected to accelerate import growth, while export growth is expected to remain moderate given the slowdown in global trade,” it said.
The World Bank’s estimates are below the government’s 7-8% annual target until 2022.
The World Bank’ forecasts match the International Monetary Fund’s 6.5% and 6.7% for 2018 and 2019, respectively. The Asian Development Bank has a slightly lower estimate of 6.4% for this year, but has the same 2019 projection of 6.7%.
The Philippines’ 6.5%, 6.7% and 6.6% updated forecasts for 2018, 2019 and 2020 are outdone or matched for the same years only by Vietnam (6.8%, 6.6% and 6.5%, respectively) and the less developed Association of Southeast Asian Nations (ASEAN) members Cambodia, Laos and Myanmar. “Developing ASEAN” — which excludes Singapore and Brunei — is expected to grow by 5.4% this year and 5.3% in the succeeding two years, while “developing” East Asia and the Pacific — which includes China — is projected to expand by 6.3% this year and by six percent in each of the succeeding two years. China itself will grow by 6.5% this year and 6.2% in 2019 and in 2020.
Other international institutions have yet to update their forecasts. The United Nations Economic and Social Commission for Asia and the Pacific as of May expected the Philippines to grow 6.8% and 6.9% this year and in 2019, respectively, while the Organization for Economic Cooperation and Development as of July projected 6.7% for both years.
Ms. Qian also noted that the “inflation is high but private consumption remains robust. That shows how the Philippines is pretty resilient to inflation.”
For Birgit Hansl, World Bank Lead Economist for Brunei, Malaysia, Philippines and Thailand, “high inflation suppresses consumption growth, but what we see in the second half you will have pre-election spending, so that will balance it out.”
Headline inflation averaged 4.8% in the first eight months, well above the 2-4% target band for 2018 after the Augusts’s 6.4% that was the fastest in about nine years.
Ms. Qian cited key downside risks to the outlook as faster policy rates hikes by the Federal Reserve and worsening trade tensions between United and China.
Such developments will trigger bigger capital outflows, in turn widening the country’s current account deficit and putting more pressure on the peso — already among the worst-performing emerging market currencies — to weaken further.
Although Ms. Qian said that the Philippines has enough buffers, the government should “monitor it (current account deficit) closely to prevent it from widening too much and too fast.”
“Philippines’ macro fundamentals are strong given the country’s flexible exchange rate regime, large international reserves, low public debt, low external debt and robust inflow of remittances. In addition, the Philippines is relatively resilient to capital flows as the country has low exposure to portfolio flows from foreign investors,” Ms. Qian said.
“Yet, given the increased global uncertainties, to mitigate downside risks, it would be prudent to monitor the evolution of the current account deficit.”
At the same time, she noted that the current account shortfall “could be considered a good deficit because it finances capital goods imports to help close the country’s long-due infrastructure gap, and that currently FDI (foreign direct investment) is financing the current account deficit.”