Further tapering by the United States Federal Reserve of its economic stimulus program will weigh on Asia’s growth, the World Bank said, warning that the Philippines may have to rely on its macroeconomic fundamentals to fight the effects of regional contagion.
The region may not escape the fallout from the US move to cut back on purchases of mortgage-backed assets and Treasuries as domestic growth gains momentum. Asian markets, including the Philippines, are particularly vulnerable given the large share of financial assets held here by foreigners.
In the “East Asia and Pacific Economic Update” released on Monday, the Washington-based global lender identified the risks faced by the Philippines as slower global recovery, financial market volatility, potential bubbles in the real estate sector, slower post-typhoon reconstruction, and a lag in domestic reform.
“As seen in 2013 and despite the Philippines’ strong macroeconomic fundamentals, the country will be affected by regional contagion, given the large share of financial market assets held by foreigners,” the report said.
Slower global recovery in high-income countries and financial market volatility could curb Philippine growth through weaker external demand, large capital outflows, and higher interest rates, the World Bank said.
Capital outflow has paced up since the US Fed announced in March that it would continue cutting its monthly purchases of US Treasuries and mortgage-backed securities by a further $10 billion to $55 billion a month, the third reduction by the US central bank in its monthly quantitative easing program.
Global growth is seen slowing to 3.0 percent this year, 3.3 percent in 2015, and 3.4 percent in 2016, while growth in high-income countries is projected to strengthen from 1.3 percent in 2013 to 2.1 percent in 2014 and 2.4 percent in both 2015 and 2016, the lender said.
In the report, the World Bank warned the Philippines against unchecked growth in the real estate sector, including shadow financing that could be a source of risk. It said the country’s strong credit and construction boom presents elements of an asset-price bubble that could unwind in a disorderly fashion if not managed prudently.
The lender, however, acknowledged the prudent measures taken by the government such as reform in the investment environment to strengthen the country’s competitiveness and enhance its capacity to generate more and better jobs. The target is to offset the impact of external factors on its growth and help it keep its pace as one of the fastest growing economies in the East Asia and Pacific region in the next two years.
The World Bank forecast that gross domestic product (GDP) in the Philippines will grow at a slower pace of 6.6 percent this year or below the 7.2 percent recorded for 2013. The forecast takes into account accelerating reconstruction spending that will offset the drag on consumption from the effects of natural disasters last year.
However, it warned that a slower pace of reconstruction spending could pull down 2014 growth by up to 0.6 percentage points.
“These projections are contingent on the immediate implementation of the reconstruction and recovery program in typhoon-affected areas,” it said.
The World Bank report also noted that the projections crucially depend on the speed and scope of the reconstruction program, adding that in the short term, a well-designed and rapidly executed recovery and reconstruction program to “build back better” can boost economic growth beyond current projections.
“This means explicitly mandating standards for safe and resilient buildings and infrastructure and for risk-informed land-use planning, and ensuring that these are implemented well,” it said.
Over the medium term, Philippine growth may accelerate to 6.9 percent in 2015 before slowing to 6.5 percent in 2016, and prospects may also be enhanced by a sustainable ramping up of infrastructure spending, it said.
Domestic reform lags, in particular, reform to raise tax revenue could undermine a fiscally sustainable acceleration of the ambitious infrastructure spending program, it added.