World Bank Group has cut its Philippine growth forecasts for 2015 and 2016, citing weak first-half results traced to slow government spending, poor exports performance and the impact of the El Niño weather phenomenon.
In its latest Philippine Economic Update, the Washington-based multilateral institution forecast gross domestic product (GDP) growth of 5.8 percent this year, down from the 6.5 percent seen in June.
This compares with the government’s 7 percent to 8 percent target and last year’s actual GDP growth of 6.1 percent.
The forecast for 2016 was also trimmed, to 6.4 percent from 6.5 percent, and the World Bank said that while prospects remained positive, external and domestic risks would continue to challenge the economy.
GDP growth is expected to ease to 6.2 percent in 2017.
The report noted that the slow pace of public spending and a contraction in net exports had pulled overall growth down to 5.3 percent in the first half of 2015. The onset of El Niño slowed agriculture growth to only 0.3 percent.
“With private domestic demand growing by an average of 6.9 percent since 2010, realizing the administration’s end-term growth target of 7 percent to 8 percent will primarily hinge in its ability to significantly increase public spending,” World Bank research analysts Joseph Louie Limkin said in a press briefing on Monday.
Accelerated implementation of public-private partnership (PPP) projects and the continuing effect of lower food inflation and declining oil prices can further support growth, the Bank said.
PPPs are projected to raise investments by 0.6 percent of GDP in 2015 and 0.8 percent of GDP in 2016, it noted, adding that since the Philippines is a major oil importer, lower prices would benefit the economy.
It said near-term growth projections for the Philippines were tilted to the downside, with the slower recovery of advanced economies, rising interest rates and China’s slowdown as key risks.
“Slower recovery of the US, euro area and Japan will limit the growth of Philippine exports,” Limkin said.
The US, euro and Japanese economies account for about half of Philippine exports, not including Chinese-assembled electronic products using Philippine-made parts.
Philippine merchandise exports are not expected to return to pre-crisis growth rates as global trade will likely stay sluggish in the medium-term.
“To raise exports amidst slower trade and more competition, the Philippines needs to start raising productivity to reduce unit labor cost, especially in light of the peso’s real depreciation. Investing in infrastructure, reducing non-tariff barriers, and improving logistics support are all needed,” Limkin said.
The multilateral also warned that an increase in US policy rates could disrupt the local financial market, but the greater concern lies in the impact on the cost of financing for both the public and private sectors.
“Responding to this threat lies in securing long-term fiscal space through revenue mobilization and enhancing macro-financial prudential measures to manage risk from in leverage,” Limkin said.
The World Bank analyst added while Chinese stock market volatility posed little risk for the Philippine financial sector, the effect of a Chinese economic slowdown would be more pronounced given trade and tourism linkages.
He said a stronger El Niño was a major risk factor, as this could hurt agriculture severely, much like the 1983 and 1998 episodes. Higher prices, slower overall growth and rising poverty would be the consequences.
“The key response to El Niño in the immediate-term is to ensure adequate food stock, especially through timely importation of rice and other key food items. In the medium-term, reforms in food policy and disaster-proofing infrastructure are essential,” he concluded.
The Philippine update came as the World Bank also said growth in the East Asia and the Pacific region would slow to 6.5 percent this year from 6.8 percent last year.
“The Philippines is among the strongest performers in the region, bucking the trend, because of strong fundamentals,” it said.
In a statement World Bank Country Director Motoo Konishi said, “The Philippines can ensure a more inclusive growth path by accelerating reforms to secure property rights, promote more competition, and simplify regulations to trigger more private investments by firms of all sizes, while sustainably ramping up public investments in infrastructure, education, health, and social protection.”