By Diego Gabriel C. Robles
THE WORLD BANK (WB) upgraded its growth forecast for the Philippines for this year and 2023, citing an “accommodative” fiscal policy conducive to recovering domestic demand despite a hawkish central bank and a pessimistic global economic outlook.
In its East Asia and the Pacific Economic Update report for October released on Tuesday, the Washington-based lender raised the Philippines’ gross domestic product (GDP) outlook to 6.5%, from the 5.7% given in April. This is at the lower end of the government’s 6.5-7.5% goal this year.
The World Bank projects the economy to grow by 5.8% in 2023, from 5.6% previously, but still below the government’s 6.5-8% assumption for next year.
Still, the Philippines’ growth projections for 2022 and 2023 were higher than the average for the ASEAN-5 (Association of Southeast Asian Nations-5) at 5.4% and 5.1% respectively. It was also above the East Asia and Pacific average of 3.2% and 4.6% for this year and next year.
The growth projections for the Philippines are second highest in the region, only lagging behind Vietnam’s 7.2% for 2022 and 6.7% in 2023.
Aaditya Mattoo, chief economist for the East Asia Pacific Region of the World Bank, attributed the Philippines’ growth outlook upgrade to the rebound of private consumption as the economy reopened after the coronavirus disease 2019 (COVID-19) pandemic-related lockdowns.
“It is also evident to us that the Philippines is one of the countries which saw reasonably good export performance. But even more than that, [it’s] the revival of both public and private investment, and some of that boost might have come related to the electoral activities in the region,” Mr. Mattoo said during a webinar on Tuesday, also citing the revival of its tourism sector.
“While some aspects of Philippine monetary policy may have been tight, its fiscal policy seems to us at least to be a little bit more accommodative,” he added.
The Bangko Sentral ng Pilipinas (BSP) has hiked its rates by 225 basis points since May.
Also, the World Bank report noted that output in Cambodia, the Philippines, and Thailand is already expected to surpass pre-pandemic levels this year.
However, it noted that while sectors like information and communication technology, finance, and agriculture have been resilient, the output of transportation, accommodation and catering sectors remains well below pre-pandemic levels in the Philippines, Malaysia and Thailand.
“In the Philippines’ case, there is also an interesting contrast,” Mr. Mattoo said. “That when it comes to agricultural policies, the Philippines has implemented significant liberalization and relied more on transfers in general than price subsidies. [But] when it comes to energy and fuel, [it is] less so.”
For next year, growth is expected to moderate as pent-up demand is expected to eventually fade amid continued elevated inflation, while public spending is anticipated to slow down in view of the limited fiscal space.
The slowdown in global economic activity was also flagged as a downside risk to growth in the Philippines and the rest of the East Asia Pacific region.
“A slowing growth of one percentage point in the rest of the world and China could mean growth in the region slowing down by more than one percentage point,” Mr. Mattoo said.
The World Bank lowered its growth outlook for the East Asia and Pacific region, which includes China, to 3.2%, down from its 5% forecast in April. Last year, the region expanded by 7.2%.
The Chinese economy is already expected to slow to 2.8%, down from its previous forecast of 5% because of the Zero-COVID policy. China expanded by 8.1% in 2021.
“Even though tourism is reviving, supporting growth in countries like Thailand, the Philippines and many Pacific Islands, the global economic slowdown is dampening demand for the region’s exports,” the World Bank said.
The World Bank also noted that inflation in the Philippines, which has averaged 4.9% in the eight months to August, is still above the central bank’s target of 2-4%.
“Food prices have increased considerably in Indonesia, Malaysia, the Philippines and Thailand during the last few months and appear to be the major contributor of higher inflation,” it said, while also noting the rise in energy prices in the Philippines, as well as in Thailand and Vietnam.
Mr. Mattoo said that the resulting increase in interest rates from various central banks, particularly the US Federal Reserve, resulted in capital outflows and has depreciated currencies in the region.
In the year to date ending Sept. 27, the peso has weakened by 15.66% or P7.99 from its P51-a-dollar close last year.
“The combination of higher interest rates and depreciating currencies means that the burden of debt is increasing,” he said.
The Philippines’ debt-to-gross domestic product (GDP) ratio stood at 62.1% as of end-June, above the 60% threshold prescribed by multilateral lenders.
“On average, primary deficits have contributed to increasing public debt-to-GDP ratio by 1.1 percentage points. The historical patterns observed in most East Asia Pacific countries suggest that relying on fiscal consolidation as a policy option to deal with high debt to GDP would be challenging,” the World Bank said, noting how previous fiscal consolidations contributed to lower debt-to-GDP ratios in the Philippines, among other countries.
According to the World Bank, the Philippines’ fiscal balance posted a deficit of 6.5% as a ratio of GDP in the first half, which is lower compared with 7.8% in the same period last year. This was due to higher tax collections and a windfall from oil excise taxes.
Before the pandemic, the negative primary deficit in the Philippines helped reduce the debt-to-GDP by 1.9 percentage points, the World Bank added.
While dollar-denominated debt is just 10% of all debt in the Philippines, most of it is shouldered by the private sector, which is another risk in itself.
“Firms in Indonesia, the Philippines, and Vietnam have a greater share of maturing debt in the form of syndicated loans than in bonds, and at least 60% of the debt coming due is denominated in foreign currency, making the firms particularly vulnerable to exchange rate depreciations,” the World Bank said.
Still, Mr. Mattoo said that foreign direct investments can still be a source of growth for the region, as it has been before.
“The kind of reforms we have seen in Indonesia and are seeing in the Philippines are definitely going to see a lot of investment creation,” he said.
“There are new areas, like the utilities and the various infrastructure services, in the Philippines and in Indonesia; especially the green transition throughout the region. I think those are going to draw in a lot of new investment.”