THE Philippines’s weak gross domestic product (GDP) growth in the first quarter and the government’s slow spending have prompted the World Bank Group to trim its economic forecast for the country this year and in 2015.
In its October East Asia Economic (EAP) Update, the World Bank said the Philippine economy, as measured by GDP, is now seen to expand by only 6.4 percent in 2014 and 6.7 percent in 2015.
In the April EAP, the World Bank forecast the country’s growth to reach 6.6 percent this year and 6.9 percent next year.
The World Bank said it also expects the country’s growth to reach 6.5 percent in 2016, which is below the government’s target of 7.5 percent to 8.5 percent.
“This lower growth was due to weak government consumption and the decline in public construction [i.e., infrastructure spending],” the World Bank added.
“In the near term, the Philippines is expected to maintain growth at 6.4 percent in 2014 and 6.7 percent in 2015. These projections hinge on the implementation
of the government’s planned spending for typhoon reconstruction and planned expenditure programs,” it added.
Further, higher inflation is also a factor that could bring down economic growth in the medium term. The Washington-based lender said inflation will reach 5 percent, the high-end of the government’s 3-percent to 5-percent target,
this year.
But it sees inflation remaining in the 4-percent range in the next two years. The increase in commodity prices is expected to average 4.5 percent next year and 4 percent in 2016.
“Food supply could remain tight throughout 2014 because of poor harvests due to weather-related disturbances, and could be exacerbated by droughts due to El Niño. In addition, because rice is a basic consumption necessity with inelastic demand, mistiming the importation of rice, which is controlled by the government, could result in sharp increases in rice prices,” the World Bank said.
It added that if inflation remains high, the central bank may be forced to undertake further monetary tightening.
However, the country’s infrastructure spending and trade performance are expected to recover in the medium term.
The bank added that private consumption, fueled by overseas Filipino worker remittances, is expected to account for more than 50 percent of the country’s overall economic growth.
“Higher government spending on infrastructure and social services, an acceleration of reconstruction, and progress with ongoing and newly awarded public-private partnership projects [worth 15 percent of GDP] will provide an additional boost to demand,” the bank added.
Nonetheless, the World Bank said there are a number of external factors that could weaken economic growth this year until 2016.
The bank said these include adjustments in China’s property market and political tensions in the Middle East and Eastern Europe.
It added that the Philippines’s territorial disputes with China may also be a factor that could affect economic growth in the near term.
“On the domestic side, the main sources of risk are low government consumption, slow reconstruction spending, and domestic reform lags, in particular reforms to raise tax revenues needed to raise infrastructure, and social-services spending,” it added.
In terms of sustaining the country’s infrastructure investments, the World Bank believes the government must consider increasing tax revenues by broadening the tax base.
This measure can be coupled with efforts to make the tax system simpler, more efficient, and more equitable. There must also be some reductions in tax rates to “increase the political feasibility of such a package.”
“The government’s planned doubling of infrastructure spending to 5 percent of GDP, and significant increases in health and education spending, require new sources of revenues. This can be achieved through a package of tax policy and administrative reforms,” the bank said.