THE ORGANISATION for Economic Co-operation and Development (OECD) expects the Philippine economy to expand by 5.7% this year, slightly below the government’s target.

“Exports may slow in 2023 due to the global economic slowdown, and tighter monetary conditions to cope with high inflationary pressures may pose a challenge for private consumption and investment growth,” the OECD said in its Economic Outlook for Southeast Asia, China, and India report.

The OECD’s gross domestic product (GDP) growth forecast for the Philippines is below the government’s 6-7% target this year. It is also slower than the 7.6% GDP expansion in 2022.

Based on the OECD projections, the Philippines has the second-highest GDP forecast among Association of Southeast Asian Nations (ASEAN) member-countries, behind only Vietnam’s 6.4%.

The Philippines is expected to grow faster than Cambodia (5.4%), Indonesia (4.7%), Malaysia (4%), Thailand (3.8%), Laos (3.5%), Brunei (3.2%), Singapore (2.2%), and Myanmar (2%).

For 2024, the OECD gave a 6.1% GDP growth forecast for the Philippines, which is also below the government’s 6.5-8% target.

“This is especially impressive given the grim outlook for the global economy and the backdrop of rising inflation and interest rates in the second half of 2022,” the OECD said.

Resilient household spending, investments, and continued growth in services and exports are seen to drive the Philippine economy’s expansion, it added.

“However, export growth is expected to perform relatively poorly in 2023 by historical standards given the slowing global economic growth, although an increase in economic activity in China following its reopening of its borders will be beneficial. Weaker domestic demand will reduce import growth in 2023,” it added.

Inflation and high interest rates will continue to hurt economic growth.

“Tighter monetary conditions will weigh on private consumption and investment growth. The Philippine peso is facing depreciation pressures, weighed down by inflationary pressures and an abnormally large interest rate differential with the United States that is driving severe capital outflows,” the OECD said.

Inflation averaged 8.3% in the first quarter, well above the central bank’s 6% full-year forecast.

To curb inflation, the BSP has increased its benchmark rate by 425 basis points (bps) since May 2022 to 6.25% — the highest in nearly 16 years.    

Meanwhile, the OECD projected ASEAN’s average GDP growth will reach 4.6% this year and 4.8% in 2024.

Emerging Asia — which refers to ASEAN plus China and India — is seen expanding by 5.3% in 2023 and 5.4% in 2024.

However, the region must continue to address external headwinds to continue to support growth.

“Emerging Asian economies still face risks that could negatively affect their growth and stability, such as inflation, the global economic slowdown and supply chain disruptions,” the OECD said.

It described the current inflationary episode in the region as “very long and persistent” and while not “particularly high,” it is still showing signals of continued acceleration.

“They face persistent inflationary pressures, including higher food and energy prices. The combination of inflationary pressures and increasing interest rates in advanced economies have put pressure on capital flows and local currencies in the region,” it added.

TOURISM
The OECD also emphasized the need to prioritize the recovery of the tourism sector to boost growth in the region.

Data showed that travel and tourism contributed 11.7% of GDP and 13.2% of employment in Southeast Asia in 2019 or before the pandemic.

The Philippine Statistics Authority The tourism sector contributed 12.7% to Philippine GDP in 2019, based on data from the local statistics authority. This shrank to 5.2% of GDP in 2021, reflecting the impact of the pandemic.

The OECD said the Philippines should focus on environmental protection and enforcement to protect its top destinations.

“The Philippines also offers a favorable business environment for tourism development, and entrepreneurs should be given clear opportunities to take advantage of it. Human capital development, including language training, will be helpful,” it added.

To mitigate risks, the tourism sector in emerging Asia should “adapt to the various challenges such as diversifying inbound markets, promoting domestic tourism and stabilizing the labor market.”

The OECD said the region can diversify sources of inbound tourism by maximizing intra-ASEAN travel and looking into untapped markets.

“Diversification of international inbound markets is recommended for some countries in the region, such as the Philippines, Vietnam, Myanmar, Cambodia and Lao PDR. Strengthening intra-ASEAN travel is recommended particularly for the Philippines and Vietnam, where there is relatively little regional traffic,” it added.

In 2019, visitors from ASEAN to the Philippines only accounted for 6% of total inbounds.

The Philippines should increase air connections to major ASEAN cities and tailor marketing efforts to attract more travelers from ASEAN, the OECD said.

“Even though cross-border travel restrictions are gone, the demand for local travel and rediscovery is growing. Domestic tourism should thus remain a priority, with the added benefits that it reduces both dependency on international arrivals and the sector’s carbon footprint,” it added,

Domestic spending comprises at least 50% of all tourism spending in Indonesia, Malaysia, Brunei, India, the Philippines, and China.

“With strong domestic tourism, Indonesia and the Philippines might pursue a product development strategy targeting domestic tourists by providing new products, experiences and services,” it added.

Equipping tourism workers with relevant skills such as languages and hospitality management, is also a priority, the OECD said.

The tourism sector must also shift to more sustainable practices.

“Visitor management strategies can help address overtourism, which damages sites and local environments, and disrupts the lives of residents. Offering alternative niche forms, such as ecotourism, can also help promote more sustainable practices and diversify the sector,” the OECD said. — Luisa Maria Jacinta C. Jocson

By Luisa Maria Jacinta C. Jocson, Reporter

BETTER infrastructure planning is needed to prepare for potential “fiscal surprises,” analysts said.

The World Bank in a recent report said developing countries must improve infrastructure governance to address fiscal surprises, as rising debt levels, higher borrowing costs, and tighter financial conditions have impacted their ability to fulfill infrastructure needs.

“An elaborate research and study are needed to identify or determine what are these ‘surprises’ as our economic situations, such as our handling of inflation, differ from other countries’ situations,” Antonio A. Ligon, a law and business professor at De La Salle University, said in a Viber message.

“It’s really difficult to give how large and frequent are the fiscal surprises of infrastructure because government management and the program of handling inflation will come into play,” he added.

From 2010 to 2018, developing countries utilized only about 70% of infrastructure investment budgets, the World Bank said.

“Closing the infrastructure gap while supporting the post-pandemic recovery requires the creation of sustainable fiscal space for infrastructure. Fiscal risks must be mitigated in order to increase the value for money from existing resources and additional capital that will need to be mobilized to close the gap,” the Washington-based multilateral lender said.

Fiscal surprises may be caused by economic factors or natural disasters, according to the World Bank. These lead to risks such as cost overrun, asset impairment, cash flow problems, early termination, and renegotiation of contracts, among others.

“Not all sources of fiscal risks from infrastructure are exogenous to the government; some are the result of moral hazard. Infrastructure projects tend to be subject to significant social and political pressures that may distort governments’ decisions regarding the selection of projects and provision modalities,” it added.

Terry L. Ridon, a public investment analyst and convenor of think tank InfraWatch PH, said that fiscal surprises can occur because of unexpected government expenditures due to public health emergencies such as the coronavirus disease 2019 pandemic or natural disasters.

“These fiscal surprises will most certainly subject government-funded infrastructure to fiscal and financing risk, as it can limit the government’s fiscal space to continue spending on both indicative and ongoing infrastructure projects,” Mr. Ridon said.

Mr. Ligon also said that fiscal surprises can also refer to “unpredicted spending or allocation of resources.”

To mitigate fiscal risks, Ateneo de Manila University economics professor Leonardo A. Lanzona said that the government should shift to a rules-based approach in infrastructure planning instead of one based on discretionary decision making.

“In financial matters, such as infrastructure, we need to return to rule-based decision making. This means that the state needs to establish clear and consistent rules, communicate them and ensure their compliance. Sources should be cited at the onset, and uses of funds should be based on a given set of guidelines,” he added.

The World Bank said that the government needs to fix flaws in infrastructure governance. It recommended the implementation of public investment management, fiscal and corporate governance of state-owned enterprises, a robust public-private partnership framework, and integrated fiscal risk management.

Mr. Ligon said that the government can also estimate fiscal surprises in certain scenarios. The National Economic and Development Authority should study these scenarios, he added.

Also, Mr. Ridon said the government should manage its debt load to ensure it will be “fiscally prepared to confront various crises which may require significant government spending.”

The National Government’s outstanding debt hit a record-high P13.75 trillion as of end-February.

Infrastructure projects should be managed based on how resilient they are against shocks, Mr. Ridon said.

“The first step is for the government to further prioritize projects which will not be shelved irrespective of crises in the future and determine which projects can remain pending until the government achieves a better fiscal status,” he said.

Institute for Climate and Sustainable Cities Director for Urban Development Maria Golda P. Hilario said the government should continue to invest in making public transport, water and irrigation systems, and health and education facilities more accessible and resilient.

“Despite the previous administration’s investment allocation of about 4.2-5.8% of our GDP (gross domestic product) on infrastructure, more still needs to be done,” she said in an e-mail.

The World Bank estimated that low- and middle-income countries will need to invest at least 3.5% of their GDP to meet the infrastructure needs of their electricity and transport sectors, as well as to be on track with the Sustainable Development Goals.

The government plans to spend 5.3% of GDP on infrastructure disbursements this year.

Ms. Hilario said infrastructure investments should take the climate crisis into account.

“Given that climate risks are already being felt and scientists are pointing out worsening scenarios especially for developing countries, infrastructure investments should integrate climate and disaster risk financing and insurance to protect and support the most vulnerable groups from climate change impacts. This will require robust partnership not just of the private sector and government, but of citizens, civil society, and communities at all levels,” she added.

State spending on infrastructure rose by 13.6% to P62.7 billion in February from P55.2 billion in the same month a year ago, data from the Department of Budget and Management showed.

Month on month, infrastructure spending was up by 24.7% from P50.3 billion in January.

In the January-to-February period, infrastructure and other capital outlays jumped by 36.1% to P113 billion from P83 billion a year ago, due to higher disbursements by the Departments of Public Works and Highways and Transportation.