Speed Up
The Asian Development Bank and the World Bank review the Philippine economy’s recent performance and look into its growth prospects for next year
By Michael B. Mundo

In October 2003, both the Asian Development Bank (ADB) and the World Bank (WB) updated their regional and country forecasts for 2003 and 2004 since their previous releases in April.

After assessing the Philippine economy in the first half, both institutions have retained their 4% GDP growth projection for 2003. While the Asian Development Bank has cut its average GDP growth projection for Southeast Asia this year to 3.9% from 4%, the World Bank has even raised its average GDP growth forecast for the region to 4.5% from 4%.

Part of the reason for the difference in average forecasts lies in ASEAN’s composition. While WB covers only Indonesia, Malaysia, Philippines, and Thailand, ADB also includes Cambodia, Laos, Myanmar, Singapore, and Vietnam. Thus, it appears the Philippine economy is expected to perform above average in the region this year under ADB’s broader classification, but below average under WB’s limited grouping.

For next year, ADB’s Asian Development Outlook (ADO) Update still expects Philippine GDP to grow by 4.5%, while WB’s East Asia Update downgraded the country’s economic growth prospects to 4.2% from 4.5%. Forecasts of both banks jive at a 4.9% average GDP growth for Southeast Asia.

Assessment
Both reports noted the Philippine GDP’s slide to 3.9% in the first semester from 4.5% the same period last year. WB attributes this performance to “slowing agricultural growth, weaker imports, the impact of the war in Iraq, SARS, and a cutback in government spending.” The ADO Update, in fact, noted the “continuing decline in public construction,” resulting in a second quarter contraction in total fixed investment.

WB Country Director for the Philippines Robert Vance Pulley nevertheless notes the country’s “reasonable economic growth in spite of adverse global developments, sporadic conflict in Mindanao, political uncertainty and investor concerns regarding fiscal sustainability.” The ADO Outlook likewise credits a generally accommodative monetary policy for the 3.9% growth and recovery in bank lending in the first half from a 0.9% contraction a year ago.

ADB also observes the economy’s resilience from the surge in overseas remittances, which fuelled GNP growth to 4.8% from 3.3%, to the faster growth rate in the manufacturing sector backed by “robust strengthening in food manufacturing.” Income from abroad is likewise expected to keep the current account in surplus by yearend, as the balance of payments “is projected to be in deficit in 2003 due to rise in resident’s investments abroad and the slowdown in FDI” in the midst of “greater domestic political uncertainties.”

Prospects
Into the second half, the economy’s growth prospects are expected to be better, according to the World Bank, coming from an increasing demand for electronics exports as the U.S., Japan, and East Asia recover, rebounding rice and corn production, and accelerating personal consumption. The East Asia Update further adds subdued inflation, lower nominal interest rates, and narrower spreads on dollar denominated bonds.

On the downside, WB points to “persistent weak investor confidence” which delays further recovery and constrains future growth, particularly after “a military mutiny in late July, subsequent coup rumors, and the suspension of top central bank officials including the governor for having closed a failed bank.”

The ADB Outlook Update echoes, “a persistently low investment rate is one of the most critical risk to higher, sustainable economic growth,” prescribing a “better fiscal management and a reinvigorated financial sector” to “help spur private investment, which has not recovered from the Asian financial crisis.” ADB notes current measures to monitor large taxpayers, undertake intensive audits on tax payments, index excise taxes to inflation, remove loopholes on excise tax on automobiles, improve VAT collection, rationalize fiscal incentives, restructure the Bureau of Internal Revenue, and give incentives to Special Purpose Vehicles so banks can clean up their balance sheets. Despite recent improvements in fiscal performance, ADB maintained its forecast fiscal deficit for the Philippines at 4.5% of GDP this year, falling to 4% of GDP next year. ADB likewise called on the government to carefully manage the increasing debt burden.

For its part, WB calls for a stronger tax administration effort, “maintained and supported by policy actions to continue the vital recovery in tax revenue beyond 2003.” WB believes government’s target fiscal shortfall this year is attainable, ending the deterioration in tax revenue to GDP ratio of the past five years. But the gains of the national government should not be eroded by the National Power Corporation’s losses, underscoring the need to push the power sector’s privatization expeditiously and to set electricity tariffs “free from political interference.” Finally, public sector spending can be contained through “continuing efforts to reform the civil service and improve public sector governance.”

For the private sector, the Special Purpose Vehicle Act needs to be complemented by the Securitization Act to facilitate corporate restructuring. WB also notes the SEC’s regulatory powers to improve standards of corporate governance.

The following year, ADB expects GDP growth to accelerate to 4.5% as agricultural growth picks up and the global environment improves, although unemployment rate is expected to remain at 10% for 2003 and 2004. Meanwhile, the World Bank believes that the country’s recent economic performance and the stable prices has not reduced poverty significantly because of the country’s high population growth. Thus, the economy needs to expand rapidly than before to address the problem of joblessness and cut down poverty incidence.