The Philippines needs higher rates of investment to bolster the pace and quality of economic gains to make a significant dent on poverty while ensuring solid safeguards against global headwinds, the Asian Development Bank (ADB) said in its latest outlook.
The Manila-based Asian lender said the country must not only rely on sustained healthy private consumption and remittances but should increase government spending on infrastructure to attract investment and build up the economy’s resilience against expected global risks.
“The challenge is to stimulate investment to raise productivity in industry, agriculture and services; specifically in advancing reforms to enhance the investment climate and accelerate infrastructure development,” Richard Bolt, ADB Country Director for the Philippines, said in the Asian Development Outlook 2015 (ADO), released on Tuesday.
Achieving higher levels of investment also requires reforms to enhance competition, improve regulatory efficiency, and reduce the administrative costs of doing business in the country, the ADB said in its flagship annual economic publication.
“These measures are needed to more create jobs and reduce poverty,” Bolt added.
GDP 2015 growth forecast
The ADB Outlook forecasts Philippine gross domestic product (GDP) will grow 6.4 percent in 2015 and 6.3 percent in 2016.
In 2014, GDP grew 6.1 percent, decelerating by about 1 percentage point from the year earlier on a slowdown in government spending.
ADB’s forecast compares with the government’s projection of 7 percent to 8 percent this year.
The bank’s forecast assumes buoyant private consumption, a solid outlook for investment and exports, and recovery in government expenditure.
The study acknowledges potential downside risks that include the possibility of recovery in industrial countries stumbling, as well as the adverse impact of potential power shortages on the island of Luzon in the summer of 2015.
The Philippine central bank has warned against external risks such as the interplay between uneven global economic growth, the uncertainty of the oil price path, along with the ambiguity of the underlying drivers of the oil price decline and the resulting divergence in monetary policy stance among major advanced economies.
Solid growth, but more needed
Bolt said that “factors that powered private consumption in 2014—growth in employment, modest inflation, and higher inflows of remittances—are expected to continue to support solid growth this year”
Bolt cautioned, however, that “while the economic outlook is bright there is a need to stimulate employment growth and continue efforts to address gaps in infrastructure.”
The ADO also highlights the need to generate more and better jobs. The report notes that even when the unemployment rate fell to 6.6 percent in January 2015, the lowest in 10 years, 2.6 million people – half of them aged 15 to 25 years – remained jobless and a further 6.5 million were underemployed. Creating good jobs in all sectors is key to reducing poverty, it added.
Govt spending critical
A key factor in the outlook is the budgeted rise in government spending to more than 18 percent of GDP—the biggest ratio to GDP in at least a decade.
The budget boosts allocations for social services and infrastructure and directs additional support for the development of agriculture, tourism, and manufacturing. A plan approved last October to rehabilitate areas devastated by Super Typhoon Yolanda will accelerate reconstruction spending, the ADO said.
The ADO explained that private consumption remained the central driver of the economy in 2014, accounting for more than 60 percent of GDP growth.
Private construction rose at a double-digit pace, driven by demand for offices, retail space, and housing, while investments in machinery and transport equipment expanded as well.
However, soft government spending in the wake of a Supreme Court ruling against the controversial Disbursement Acceleration Program (DAP) weighed on the economy, while damage from Yolanda and other storms hurt agricultural output for much of last year.
Inflation quickened to 4.9 percent in August, the highest in three years, but then eased on better harvests, additional rice supplies from imports, and plunging global oil prices to average 4.1 percent in 2014.
Inflation is projected to slow to average 2.8 percent in 2015, due largely to lower fuel prices, although a potential El Niño weather effect in the first half of the year, along with possible power rate hikes, could put upward pressure on prices.
The government aims to double outlays on infrastructure from 2 percent of GDP over the past decade to 4 percent in 2015 and further to 5 percent in 2016. Further progress on the government’s public-private partnership program will help to achieve this ambitious target, the ADO added.