The Asian Development Bank (ADB) has trimmed its outlook for Philippine economic growth in 2014 and 2015 as low government spending, higher inflation, and associated monetary policy tightening are expected to dampen economic activity.
In its Asian Development Outlook 2014, released on Thursday, the Manila-based lender cut its growth forecast for the country’s gross domestic product (GDP) this year to 6.2 percent from the previous forecast of 6.4 percent, lower than the government’s target range of 6.5 percent to 7.5 percent and the actual pace in 2013 of 7.2 percent.
It also reduced the growth outlook for 2015 to 6.4 percent from a projection made in April of 6.7 percent.
According to the new annual report, the slightly slower growth projected for the Philippines is due largely to a slowdown in government consumption, which tumbled to 0.9 percent in the first half of 2014 from 11.1 percent in the same period last year.
“The slowdown came off a high point in 2013, an election year, but also reflects caution among government agencies amid concerns about the misuse of public funds. The outlook assumes steps taken to address administrative bottlenecks will accelerate fiscal disbursement from late 2014,” it stated.
Inflation a key factor
Another factor that the lender cited for its revised outlook for the country is the rising inflation rate, which reached 4.9 percent in August as the impact of typhoons on food supplies pushed up prices, raising the year-to-date average to 4.4 percent.
As a result, the ADB said rising inflation and strong growth in liquidity prompted the central bank to raise policy interest rates in July and again in September, and to increase reserve requirements for banks.
In the report, the lender said it is seeing average inflation rate to further accelerate and reach 4.4 percent this year, the highest in three years, from the previous forecast of 4.3 percent, while the forecast for 2015 also edged up to 4.1 percent from 4 percent.
“Monetary policy is expected to tighten further as inflation is near the upper end of the central bank’s 2014 target range of 3 percent to 5 percent,” it said.
Despite the downside risks from inflation, the ADB said the Philippines is still poised for slightly stronger economic growth through the rest of this year and in 2015 on expectations that post-typhoon reconstruction accelerates, government fiscal disbursement improves, and exports benefit from brighter prospects in the major industrial economies.
“Reconstruction in the areas hit by severe typhoons is expected to speed up by the end of this year,” it said, citing the governments’ master plan for the recovery and rehabilitation of the affected areas, which involve outlays of about $4 billion for infrastructure, resettlement, social services, and restoring livelihoods.
Budgetary support for growth
Fiscal policy is expected to be more supportive of economic growth in 2015 as the government’s proposed 2015 budget will increase spending by 15.1 percent over 2014, with increases for social services, infrastructure, and investment in agriculture, tourism, and manufacturing, it said.
In addition, the lender pointed out that the government has launched initiatives to strengthen competition, enhance the regulatory framework for public–private partnerships, develop capital markets, and boost access to finance.
“Such initiatives can raise the country’s competitiveness, support small and medium enterprise development, raise investments in outlying areas, especially in the southern Philippines, and foster subregional economic integration,” it said.
Meanwhile, ADB said consumer spending, supported by large remittance inflows and accounting for two-thirds of GDP, will continue to fuel economic growth.
It also said that indicators of private investment are favorable, and surveys conducted by the Bangko Sentral ng Pilipinas (BSP) find that business sentiment is generally positive in the country.
“Foreign direct investment, though low compared with other countries in the region, jumped 77 percent in the first half of 2014 to $3.6 billion—and almost doubled in 2013 to $3.8 billion from an annual average of about $2 billion in 2008–2012,” it noted.
In addition, private construction, while moderating from the rapid pace of recent years, is also projected to expand through the forecast period.