Among Asian economies, the Philippines proves to be the hardest to predict in terms of growth. Will it pull off another surprise in 2005?

By Michael B. Mundo

In April 2005, four foreign institutions released separate economic reports containing 2005 prospects for Southeast Asia, including the Philippines.

On the average, growth is expected to slow down in Southeast Asia in 2005 as consumer prices continue to rise on account of higher world oil prices. Among five ASEAN economies, Malaysia is now expected to post the fastest economic growth, surpassing prospects for Thailand. At the other end of the rope is Singapore, which is predicted to register the slowest pace of expansion in 2005.

In 2006, economic growth is projected to pick up and inflation to slide down a bit. Thailand’s economy is expected to take the lead, while Singapore’s economy is again expected to lag behind within ASEAN-5. Similar to 2005, inflation is projected to remain the highest in Indonesia and the lowest in Singapore in 2006.

Near Hits

Looking back at 2004, the World Bank’s growth forecasts for Singapore, Indonesia, and Malaysia came comfortably close to actual economic performance. The International Monetary Fund (IMF) likewise gave an accurate projection of the Thai economy’s expansion. In 2003, only the United Nations’ Economic and Social Commission for Asia and the Pacific (UN ESCAP) gave an accurate forecast of the Philippine economy’s growth pace.

In terms of inflation, the 2003 projections of the Asian Development Bank (ADB) for Singapore, Indonesia, and Malaysia were accurate, as well as its 2004 projections for Singapore, Malaysia, and Thailand. The International Monetary Fund hit the bull’s eye on Indonesia’s inflation rate for 2003 and on Thailand’s inflation rate for 2004. IMF’s inflation forecast for Singapore last year also came close to actual performance. UN ESCAP’s inflation forecast for Indonesia last year likewise proved to be accurate.

For the ASEAN-5, the past two years have shown the reliability of GDP forecasts from the World Bank and the accuracy of inflation forecasts from the ADB and the IMF.

Closer Look

Zeroing in on the Philippine economy, the Asian Development Bank’s 2005 report gave the most extensive discussion on the country’s prospects among the four recent economic reports, citing the country’s weakness in the external sector over several periods. It said the Philippines had the “slowest growth in exports in the last decade.” Growing trade deficits have led to the deterioration of the country’s net exports, revealing a bias for policies that favor expansion in domestic private demand and against exports. The ADB report observed that currency overvaluation and overborrowing resulted in declines in the growth of productive capacity after the Asian crisis.

The report also pointed out that the Philippine government’s medium-term growth targets are too high. For the Philippine economy to meet these targets, ADB required a higher investment-to-GDP ratio and “the will to put the country on a high growth path.” ADB was aware of the country’s “poor investment climate” and “current problems with the budget deficit and debt.” Thus, “a weak fiscal situation and hesitant investment could lead to growth below potential, at rates of around 5.0%.”

The regional bank downgraded its previous Philippine growth projection of 5.5% for 2005 to 5.0%. It reasoned that over the next three years, the country’s agriculture growth is expected to decelerate to 4.0%, and industry expansion is projected to slow down to 4.0%. The service sector is also seen to maintain its 7.0% growth performance. On the demand side, personal consumption is expected to increase by 5.0%, government consumption by 5.0%, capital formation by 7.5%, exports by 7.5%, and imports by 6.5%. ADB revised its 2005 inflation rate projection for the Philippines to 6.5% from 5.5%. ADB also expects the country to post a current account surplus equivalent to 2-3% of GDP.

Three Views from UN

On the other hand, the IMF’s April 2005 World Economic Outlook raised the Philippine economic forecast for 2005 to 4.7% from 4.2%. The outlook stated Philippine growth is expected to weaken to 4.5% by 2006 since domestic demand will continue to be affected by increases in oil prices, coupled with the impact of higher U.S. interest rates. The IMF report also cited the risk posed by the high level of public debt and the lagging implementation of fiscal reforms.

The Fund has retained its previous 6.8% 2005 inflation forecast for the Philippines and released a lower forecast of 4.9% for 2006. It attributes higher oil prices abroad to the rising demand from China and the United States. With weak external demand from Japan and an excess capacity in the IT sector abroad, the IMF also projects the Philippines’ current account surplus to narrow to 2.0% of GDP in 2006 from 2.6% in 2005.

The World Bank’s April 2005 East Asia Update is more optimistic than the IMF in projecting Philippine economic growth for 2005, raising it to 5.0% from 4.5%, despite a first quarter weakened by high oil prices and poor agricultural production. GDP growth is expected to remain at 5.0% for 2006. The World Bank goes further by projecting the country’s poor population (those living below US$2 a day) to decrease to 35.1 million and 34.3 million in 2005 and 2006, respectively, from 35.7 million in 2004. It believes that the Philippines could gain advantage from a free-trade arrangement with China (particularly in terms of fruit exports) if it goes along with other ASEAN countries that participated in ASEAN’s “Early Harvest Program.” The program is a free-trade arrangement under the framework of the China-ASEAN Free Trade Area and is designed to accelerate the implementation of the China-ASEAN Economic Cooperation Framework Agreement.

The UN ESCAP’s Economic and Social Survey of Asia and the Pacific 2005 brought down its original Philippine GDP growth forecast for 2005 to 5.3% from 5.8%, and raised its inflation forecast to 6.0% from 4.0%. These were in consideration of strong inflationary pressures exerted by supply shocks – higher food and energy prices in particular. UN ESCAP wants a pro-poor growth for the Philippines “to generate enough jobs for the growing labor force.” But high debt service restrains public spending on infrastructure and social services. The ESCAP survey calls the Philippine government’s attention to threats to the country’s competitive advantage in terms of wages and English language proficiency.

Surprise Ahead?

In 2003, Philippine GDP expanded 4.7%, way ahead of the 4.0% consensus among ADB, IMF, and the World Bank. Only the UN ESCAP came close to the actual record, missing the figure by a hairline. UN predicted Philippine growth at 4.6%.

Given the Philippine economy’s weakness in the fiscal sector, its 6.1% growth in 2004, though lower than the ASEAN average, surprised the government and multilateral institutions. The IMF projected a 5.2% growth; World Bank and UN ESCAP, 5.4%; and ADB, 5.5%. The World Bank’s East Asia Update called the 2004 Philippine achievement as “strong economic growth.” The UN ESCAP’s survey observed it to be “remarkably resilient” in the midst of “rising oil prices, slowing global demand, fragile investor confidence, political uncertainty, and a series of typhoons” late last year. The ADB outlook noted the Philippines’ 2004 growth as “the highest rate in 15 years,” but was concerned that the rate would likely ease over the next three years.

ADB identified the challenges the country faces ahead apart from the fiscal deficit and the debt – unemployment reduction, debt management, power sector reforms, and investment climate improvement. If in the past two years, the Philippine economy grew stronger than expected, can it still spring another surprise over the next two years despite the serious problems that prevent it from moving up to a higher growth path?