The World Bank Group maintained its GDP growth forecast for the Philippine economy at 6.4 percent this year, citing election-related government spending as the major driver of expansion, but warning of lingering potential risks from external economic factors and the effects of El Niño.
The Washington-based multilateral lender projections and views were based on its newly
launched April 2016 “East Asia and Pacific Economic Update” report.
The bank’s projection was below the official 6.8 percent to 7.8 percent target of the government but much higher than the 5.8 percent growth in 2015.
“In the Philippines, there is a lot of election spending which boosts demand, and that is one of the reasons that growth will be reasonably robust,” Sudhir Shetty, WB chief economist for the East Asia and the Pacific region said via video conference from Washington D.C.
According to the report, stronger government spending related to the election could stimulate private consumption and in turn increase gross domestic product (GDP) growth by 1 percentage point in the first half of 2016.
In addition, low inflation, fueled by low oil prices, will continue to drive domestic consumption.
In a briefing at its Manila office, the multilateral lender also said investments will likely support growth as implementation of key private sectors, budget, and public-private partnership (PPP) projects accelerates.
“Growth prospects for the Philippines remain positive due to its favorable macroeconomic and policy environment. The country continues to benefit from solid macroeconomic fundamentals. This provides the country with the flexibility to use a range of policy tools to withstand shocks from the weaker global environment,” said Karl Kendrick Chua, WB’s senior country economist in the Philippines.
In a more detailed “Philippine Economic Update,” report, the WB noted that risks to growth include the slowdown of remittances from oil-exporting countries and lower net exports due to weak external demand.
“On the external front, sluggish trade recovery will weigh down Philippine external demand. Slower growth of large emerging economies such as China and uneven recovery among high-income economies, such as Japan, the US, and the Euro zone, all major trading partners with a combined 60 percent market share, will impede the recovery of Philippine exports,” it said.
Developments in China can also negatively affect the Philippines, it said, noting that it can dampen expectations in the local financial markets and hold back Chinese investment, given increasing investment links between China and the Philippines.
“In addition, exports to China and receipts from Chinese tourists could also be affected should China’s growth edge lower than expected,” it said.
Philippine exports to China account for around 13 percent of total exports, and thus could have some effect on growth, it said. China was also the fifth largest tourism market in 2015 with receipts of P10 billion. In 2015, half a million Chinese tourists visited the Philippines.
Meanwhile, downside risks to consumption growth may come from the slowdown of remittances, especially from oil exporting countries.
“From a 7.2 percent growth in 2014, cash remittances slowed to 4.6 percent in 2015. In 2015, some 1.5 million overseas Filipino workers in the Middle East held temporary contracts and for some of them, especially those working in the construction sector, continuation of their contracts may be more uncertain in the future,” it said.
On the domestic side, the effect of El Nino on growth could be significant if food imports are inadequate, the WB pointed out.
The direct effect of El Nino on economic growth is likely to be small, as agriculture comprises only a small share of the Philippine economy, it said.
“While the peak of El Nino has passed, the country is still expected to feel its effects through the second quarter of 2016 and the indirect impact on prices and consumption growth can be high if food supply is not managed well,” it said.
The lender added that high food prices could lead to an uptick in poverty as the poor are susceptible to food price shocks.
On the bright side, the WB noted that the outlook on services and manufacturing is positive, while agriculture is expected to recover moderately.
The business process outsourcing (BPO) industry is seen continuing as a key driver of the services sector, with revenues expected to surpass OFW remittances by 2018.
“With average revenue growth of 14.8 percent, BPO are expected to reach $35 billion in 2018, surpassing the projected value of remittances at about $34 billion given prevailing growth rates,” it said.