Converging Outlooks
International agencies’ revised GDP growth forecasts on the Philippines converge
By Michael B. Mundo
In April 2005, the International Monetary Fund projected that the Philippine economy would grow 4.7% for the year. The Fund maintained this estimate in its September 2005 World Economic Outlook. This is clearly a decline from the 6.0% growth recorded in 2004. Nevertheless, the Fund is a little more optimistic about the country’s growth prospects in 2006. From the 4.5% growth projection for 2006 that the IMF announced in April 2005, it revised the projection to 4.8%.
According to the Fund’s recent postprogram monitoring report for the country, “expansion will continue to proceed at a solid pace in the near term.” The IMF wants reforms, such as the expanded value-added tax, to take off the ground to make the Philippine economy conducive to investment and growth. The agency believes that if reforms are stalled, growth is expected to be moderate, at best, with unemployment remaining high. Furthermore, investments will likely remain subdued and GDP growth unlikely to exceed 4.75–5% in 2005 and 2006. Soaring world oil prices are seen to dampen the outlook, softening demand for the country’s exports. The report also warned of severe consequences from a correction in long-term global interest rates.
An Upbeat Postscript
As we went to press in November, an IMF post-program monitoring mission to the Philippines released its report. Owing to progress on significant economic reforms, such as the implementation of the expanded value-added tax, the review team raised Philippine GDP growth projections to 5.0% from 4.7% for 2005 and to 5.0% from 4.8% for 2006. Inflation is expected to average 7.7% from the previous forecast of 8.2% for 2005. For 2006, however, inflation is seen rising to 7.8% from the previous forecast of 7.5%.
The IMF mission noted the rallying of the stock market, the tightening of sovereign bond spreads, and the appreciating peso against the U.S. dollar. The mission also said it expects a significant reduction in the public fiscal deficit due to a cut in the National Power Corporation’s losses. On the other hand, the team also pointed to risks, including oil price spikes abroad, a possible outbreak of avian flu, softened demand for electronics exports, and adverse developments in the capital markets that could raise borrowing costs. The IMF representatives recommended rationalizing fiscal incentives to balance the budget over the medium term. |
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In contrast, according to the IMF’s Asia-Pacific Regional Outlook also released in September 2005, Asian growth is expected to average 6.1% in 2005 from 6.8% in 2004 and to slow down further to 5.9% in 2006. Growth in “Emerging Asia” is projected to average 7.4% in 2005 from 8.0% in 2004 and is projected to decelerate further to 7.0% in 2006. But in ASEAN-4 (Indonesia, Malaysia, Thailand, and the Philippines), according to the World Economic Outlook, average GDP growth is going to accelerate to 5.4% in 2006 from 4.9% in 2005.
ADB’S Reading
The Asian Development Bank’s Asian Development Outlook 2005 Update, on the other hand, cut the 2005 GDP growth forecast for the Philippines to 4.7% from 5.0%. For 2006, expected growth was also lowered to 4.8% from 5.0%. On a bigger scale, ADB’s growth forecast for Asia remains at 6.6% for both 2005 and 2006 from 7.4% in 2004. Among Southeast Asia’s nine economies, the regional bank expects average GDP growth to slow down to 5.0% in 2005 from 6.3% in 2004 and to step up to 5.4% in 2006.
According to the Update, the Philippines is one of the countries in the region that are vulnerable to high global oil prices. It says that investments in the Philippines are likely to remain weak through 2006 and the country’s constrained budget position effectively rules out any major fiscal stimulus. It noted the shortfalls in the collection targets of both the Bureau of Internal Revenue and the Bureau of Customs for the first seven months of 2005. This is despite the implementation of a revised “sin” tax law early in the year that increased the excise tax rate on alcohol and tobacco products.
Nevertheless, ADB believes that remittances from overseas workers will continue to assist consumption, and the expected upturn in the global electronics cycle will help industrial production and exports.
Easing Prices
Inflation is expected to ease down in 2006. The IMF revised its 2005 inflation outlook for the Philippines to 8.2% from 6.8%, and for 2006 to 7.5% from 4.9%. In terms of end-year inflation, the institution expects it to come in at 8.1% and 6.0% for 2005 and 2006, respectively, from 8.6% in 2004.
In Asia, average inflation is likewise expected to slow down to 3.0% in 2005 from 3.5% in 2004, but will rise to 3.5% in 2006. But in Emerging Asia, inflation is expected to be higher at 3.9% in 2005 and 4.4% in 2006 from 4.4% in 2004. Within ASEAN-4, average inflation is projected to be on a downtrend, slowing down to 5.1% in 2006 from 6.4% in 2005. In 2004, average inflation in ASEAN-4 was at 4.5%.
The IMF noted that the country’s monetary authorities are committed to promote price stability, as shown by the rate hike in April and the rise in reserve requirements in July. The Fund’s report also observed that the Bangko Sentral ng Pilipinas has not ruled out further policy action given increasing concerns on “recent liquidity growth and narrowing interest rate differentials.” Inflation is likely to exceed the BSP’s 5–6% target for 2005 and 4–5% target for 2006.
For its part, ADB also adjusted its inflation forecast for the country to 7.5% from 6.5% for 2005 and to 7.0% from 6.0% for 2006. In Asia, in general, and Southeast Asia, in particular, the regional bank believes that inflation is going to slow down to 3.3% and 4.9% in 2006, respectively, from 3.5% and 5.1% in 2005. The average inflation rates in Asia and Southeast Asia in 2004 were 4.0% and 4.2%, respectively.
ADB’s Update noted “the impact of weaker agricultural production on food prices will continue into 2006, while the higher-than-expected oil prices are likely to lead to demands by suppliers for higher power tariffs and transport fares, and by labor groups for wage increases.” The regional bank foresees a second round of upward pressure on prices. ADB recommends that the Philippine government balance economic efficiency and financially remunerative product and service pricing, with social equity. The bank prescribes against administrative price caps to minimize subsidy demands on the budget. It further recommends nonprice, targeted remunerative tools to provide safety nets for vulnerable consumers.
Meanwhile, overseas workers’ remittances are expected to keep the country’s current account in surplus over the next two years. The IMF cut its forecast current account surplus–to–GDP ratio for the Philippines to 2.1% from 2.6% for 2005 and to 1.9% from 2.0% for 2006. On the other hand, ADB raised its current account surplus–to–GDP ratio projection to 4.0% from 3.0% for 2005 and to 3.6% from 2.2% for 2006.
Fiscal Hold
Both the IMF and ADB continued to focus on the importance of reforms in the country’s fiscal sector. According to ADB’s Update, prospects for fiscal consolidation in the Philippines hinge on tax reforms, efficient delivery of public services, reduced costs, reduced interest burden, better financial shape of government corporations, accelerated privatization, and enhanced revenue mobilization by local governments. Fiscal consolidation is also important for the IMF so that the debt stocks of countries will not keep on rising.
In the Philippines, the IMF cited the importance of implementing VAT reform to reduce the public sector deficit below 3.0% of GDP. Increasing the VAT rate to 12.0% will cut the nonfinancial public-sector deficit to about 2.75% of GDP in 2006. Other needed measures include the rationalization of fiscal incentives. If the momentum for fiscal reforms continue, the public debt–to–GDP ratio is projected to fall below 70.0% of GDP by 2010.
ADB pointed out, however, that its forecasts are subject to “a greater than usual degree of uncertainty, given the impact rising global oil prices have on the economy, disruptions to the tax legislation, and political uncertainty.” The IMF also added that the longer the current political issues remain unresolved, the more the markets will fear that economic reforms will be sidelined.
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