PHL prospects cited amid challenges

In its April Philippine Economic Update, titled: "Moving Full Speed Ahead: Accelerating Reforms to Create More and Better Jobs," the multilateral lender affirmed the projected 6.4% and 6.2% increase in the Philippines' gross domestic product (GDP) for 2016 and 2017. It also gave a 6.2% projection for the country in 2018.

"Growth prospects for the Philippines remain positive due to its favorable macroeconomic and policy environment," World Bank senior economist Karl Kendrick Tiu Chua said in a media briefing in Taguig City following the release of the report yesterday.

This year, Philippine economic growth is expected to accelerate from the 5.8% recorded in 2015, given the increase in both private and government spending ahead of the elections and faster implementation of public-private partnership (PPP) projects.

"Private consumption would remain robust, aided by low inflation and spillovers from increased spending due to the upcoming general elections," according to the report.

Mr. Chua noted the "clear pattern" of first-half GDP growth usually accelerating by as much as two percentage points in a presidential election year. For 2016, the World Bank expects an additional one percentage point from a stronger government spending related to the election.

"We think given the kind of elections that we have and given the rising role of social media, of [television], tri-media, this is actually creating a lot of room for spending plus you have government advancing spending to meet the election ban," Mr. Chua said.

In addition, PPP projects could contribute 0.8% of GDP in additional investment spending, while continued efforts to address budget planning and execution could further improve government spending.

The Philippines' GDP expansion is expected to taper to 6.2% next year and in 2018, as the economy "normalizes" after the election cycle, according to the World Bank report.

"[T]he Philippines remains among the fast-growing countries in the East Asia and Pacific region despite the challenging global environment," World Bank Country Director Mara K. Warwick noted. The update titled "Growing Challenges" pegged the region's economic expansion decelerating to 6.3% and 6.2% in 2016 and 2017 from the 6.5% recorded in 2015.

The World Bank provided the same projections in the January edition of its Global Economic Prospects report titled "Spillovers amid Weak Growth."

But estimates from the October 2015 update were higher at 6.4% and 6.3%.

"This slowdown, in line with what was projected last October, reflects mainly the ongoing growth moderation in China," according to the latest report.

Among larger Southeast Asian economies, the Philippines and Vietnam showed the "strongest growth prospects."

The Philippines also continued to figure among the fastest-growing economies in developing East Asia and the Pacific, trailing only the growth forecasts for Myanmar (7.8%), Laos (7.0%), Cambodia (6.9%) and China (6.7%) for this year.

In its June 2015 Global Economic Prospects report, the World Bank forecast a 6.5% growth for the Philippines this year. The projection was revised down to 6.4% in October 2015.

Two other multilateral lenders -- the International Monetary Fund (IMF) and the Asian Development Bank (ADB) -- earlier trimmed their respective growth forecasts for the Philippines although they took note of the economy's relatively better position amid global headwinds. The IMF expects Philippine GDP to expand 6% and 6.2% for 2016 and 2017. The ADB, meanwhile, projected a 6% and 6.1% growth for the same years.

"The country continues to benefit from a solid macroeconomic fundamentals. This provides the country with the flexibility to use a range of policy tools to withstand shocks from the weaker global environment," Mr. Chua said.

RISKS, CHALLENGES

Risks to the Philippines' economic outlook have remained broadly unchanged since October 2015, according to the latest World Bank report.

Key risks include the uneven recovery of high-income economies, slower-than-anticipated growth of large emerging market economies and financial market volatilities.

Slower growth in China and uneven recovery in Japan, the United States and the Euro zone -- countries accounting for 60% market share for Philippine exports -- will impede the recovery of local traders.

"This period of slow external demand provides the country with a window of opportunity to address competitiveness constraints such as power, logistics and non-tariff barriers," according to the Philippine Economic Update.

The World Bank also cited risks from slower remittance growth from oil exporting countries, the El NiAo-induced drought this semester, delays in PPP projects and uncertainty regarding the outcome of the May 9 elections. In particular, a slowdown in remittances from overseas Filipino workers in Middle Eastern economies facing pressure from lower oil prices poses downside risks to consumption growth. Such inflows drive household spending that fuels up to 70% of GDP.

"Moreover, increasing global concerns over money laundering could affect the cost of sending remittances, if there is an increase in closures of bank accounts of remittance forwarding companies," the World Bank noted.

Achieving more inclusive growth, meanwhile, remains a challenge for the Philippines, noted Rogier van den Brink, lead economist in the World Bank's Poverty Reduction and Economic Management Department.

"In the Philippine context, this means growth that creates more and better jobs. This has been a daunting challenge for decades with 14.6 million jobs that need to be provided by end of 2016."

The lack of competition, complex regulations, insecure property ownership and underinvestment in both human and physical capital have supposedly hampered efforts to realize inclusive growth.

"They lead to low agricultural productivity and weak manufacturing. The results for 95% of Filipinos who are not rich are high rates of informality, stubborn poverty and out-migration," Mr. van den Brink said.

POLICY REFORMS

The World Bank economist recommended policy reforms to address the country's "very well-known" problems, including the liberalization of certain sectors.

In addressing the lack of competition in the Philippines, the economist proposed cutting the list of sectors where foreign investment is restricted to further open the economy.

The telecommunication, shipping, construction and rice sectors have the largest to gain and the potential to generate jobs, increase real income and improve quality while lowering prices, Mr. van den Brink noted.

As for the rice sector, Mr. van den Brink recommended replacing the import quota with an import tariff initially fixed at 30% to cut prices, which currently hover two to three times higher than in other Asian countries.

Mr. Chua, meanwhile, cited the need to ramp up government spending on infrastructure and social services to fund an investment deficit amounting to almost P900 billion, equivalent to 6.8% of GDP.

Accordingly, the government will have to raise more revenues through policy and administration reforms to fund the annual investment deficit, Mr. Chua said.

"Higher revenues do not necessarily mean higher tax rates as tax administration can be improved substantially, as the government has done. However, relying solely on tax administration reforms is not enough."

Mr. Chua said the government may consider the following measures: rationalize tax incentives; index tax rates and valuations to inflation; and remove certain value-added tax exemptions and implement instead a program similar to conditional cash transfers to protect the vulnerable.

"Only if new revenues are raised should reforms to reduce tax rates be considered," Mr. Chua noted.

Messrs. Chua and van den Brink also reiterated the World Bank's "long-standing" position on easing the country's bank secrecy law in light of the $81-million money laundering controversy and leaked documents linking the world's elite to money held in tax haven countries.

The World Bank, in the Philippine Economic Update, further recommended the expansion of the Anti-Money Laundering Act to include sectors such as casinos alongside.

"If these well-known structural reforms are implemented, and recent trends are sustained, the Philippines will be able to reach its goal of eradicating poverty within one generation," Mr. Chua said.

Source: Bworld Online