WASHINGTON-BASED World Bank has cut its growth projections for the Philippine economy for this year and the next, taking into account the impact of natural disasters, slow government spending and the tightening of the financial environment in the country.
In its Philippine Economic Update released on Thursday, the World Bank said its growth projections for the country were revised downward to 6.4 percent from 6.6 percent for 2014 and to 6.7 percent from 6.9 percent for 2015.
The lender’s latest estimates fell below the government’s growth targets of between 6.5 percent and 7.5 percent for 2014 and between 7 percent and 8 percent for 2015.
The revision reflects the slow start of the economy in the first quarter of 2014 given the effects of Supertyphoon Yolanda, lower government spending in the second quarter, and monetary policy tightening in the first seven months of the year, the Bank said.
Among the fastest
Despite the slight downgrade, growth for 2014 is still projected to be one of the fastest among the major economies in the East Asia region, second only to China, which is projected to grow by 7.6 percent, and significantly higher than the regional average of 5 percent, excluding China, it said.
In a press briefing, World Bank Senior Country Economist for the Philippines Karl Kendrick Chua said the growth projections will depend on the ability of the government to fully and rapidly implement planned spending for typhoon reconstruction and other expenditure programs, in particular infrastructure.
“In the last four years, the government has doubled spending on social services and has provided more money for developing the country’s infrastructure. Sustaining these efforts will close the remaining gaps brought about by decades of lagging public investment,” he said.
Gaps in spending, fiscal management
Explaining where the gaps are, Chua noted that the country’s spending on roads, bridges, ports, airports, as well as machines and equipment has generally been declining since the 1970s, and is now well below that of its peers.
He also mentioned that the Philippines spends 30 percent to 50 percent less on infrastructure, health and education compared with its fast-growing neighbors.
“The key risks are domestic reform lags, in particular reforms to raise the tax revenues needed to sustainably increase infrastructure and social services spending,” Chua added.
According to Chua, financing the increase in investments will need to come from a combination of tax policy and administration reforms to make the tax system simpler, more efficient, and more equitable.
In particular, the tax burden and cost of compliance for small businesses need to be reduced in the interest of job creation, he said.
“The government has successfully raised tax revenue equivalent to 1.2 percent of GDP (gross domestic product) in the last three years through the sin tax reform, improved tax administration, and higher growth. Accelerating the current reform momentum would help the country yield additional tax revenues to further expand growth that can benefit more poor Filipinos,” said Chua.
In addition, the World Bank said accelerating key reforms to secure access to land, promote competition, and simplify business regulations will also help create more and better jobs and bring more people out of poverty.
External risks recognized
It said a number of external factors also pose risks to growth. External risks come from monetary tightening in high-income countries, a potential hard landing for China’s economic rebalancing, political tensions in the Middle East and Eastern Europe, and territorial disputes in the region.
“Moving forward, the challenge facing the Philippines is how to transform strong growth and macroeconomic stability into more inclusive growth—the type that creates more and better jobs and reduces poverty,” Chua said.