World Bank upgrades RP growth outlook for 2010

(UDPATED) World Bank economists have upgraded their growth forecast for the Philippines to 3.5 percent this year given a stronger outlook for the global economy, more money sent home by Filipinos abroad, increased consumption and robust government spending. The latest outlook, which came out in the bank’s Philippines Quarterly Update publication in February but released only on Monday, was better than the 3.1-percent forecast in the previous issue, and still within the government’s target of 2.6-3.6 percent. The Philippine economy grew by a measly 0.9 percent last year amid the global economic slump. The World Bank expects the country to grow faster at 3.8 percent next year. But the bank cited the need for a detailed and credible strategy to plug the government’s widening budget deficit over time, which it said was crucial to investor, entrepreneur, and consumer confidence — all needed for "inclusive growth." It also asked the state to impose a moratorium on tax-eroding measures, rationalize fiscal incentives, simplify net income taxation to improve compliance among the self-employed and professionals, and adjust excise taxes for tobacco, alcohol and gasoline, among other reforms. "Tax administration reforms would boost short-term revenue gains while paving the way for long-term improvement in administrative efficiency," said World Bank senior economist Eric Le Borgne, who led the team that prepared the quarterly report. The World Bank also warned of weak social and labor market indicators, reflecting the series of crises that had hit the country. "Unemployment and underemployment are both rising, as is the labor force participation rate as households seek additional income in response to falling real wages and hours worked," the World Bank said in its latest report. Shared optimism Local economists shared the World Bank optimism, citing stable consumer prices that allow the central bank to keep benchmark interest rates steady to encourage corporate expansions to support the economy. They also noted that the Philippines is coming from a low growth base. "Most economies, including us, are coming from a low base. It’s (World Bank outlook upgrade) reasonable and warranted," Grace Cerdenia, chief operating officer of brokerage 2TradeAsia, told GMANews.TV. "We’ve seen inflation being managed well. Part of the economic boost will also come from remittances, which have been factored in already, as well as infrastructure spending," she added. Cerdenia said monetary policy is more than enough to put a cap on liquidity growth and prevent prices from spiraling up. "Inflation is relatively benign and of course, infrastructure spending is a given most especially after the elections," she pointed out. Economist Victor A. Abola of the University of Asia and the Pacific is even more optimistic, assuming current monetary policy does not restrict growth. "My most conservative estimate is 3.8 percent growth given the strong performance of exports. We will probably go beyond 4 percent. Also, the base is very low," he said in a phone interview. Philippine exports grew at their fastest pace in almost 15 years in January amid the global economic recovery. Export earnings surged by 42.5 percent to $3.578 billion from a year earlier and by 8 percent from the December level due to a pickup in demand from the country’s major trading partners. Abola thinks the central bank still has room to cut overnight rates, which banks use to price their loans, noting that there seems to be a bias for a strong peso. "We're losing competitiveness as a result. Our minimum wage in dollar terms is also higher," he pointed out. Abola said the central bank could still cut rates by 50-100 basis points to make housing loans more affordable and generate more employment. Fragile but firm In its report, the World Bank said growth in private consumption would likely hold up well this year as demand benefits from increased election spending, but its pace will be slower than in pre-crisis years. "The rising precautionary savings that dampened spending in 2009 will likely diminish as consumer expectations gradually improve over the next twelve months," it said. Other important growth drivers for 2010 include a replenishment of depleted stocks by private companies, and the strong short-term outlook for the business process outsourcing (BPO) sector, the bank said. The World Bank noted that while the global economic recovery is still fragile, it is on firmer grounds. After an unprecedented 2.2-percent decline last year, global economic output is expected to grow by 2.7 percent this year and accelerate modestly to 3.2 percent next year. "As the positive impact of the unprecedented fiscal and monetary stimuli and the inventory cycle wanes, the pace of the recovery is projected to slow down. This is in part because spending is expected to be less buoyant, with households and the banking sector in need of rebuilding their balance sheets," the report said. It again cautioned governments against rapidly withdrawing fiscal and monetary stimulus measures, which it said could result in a "double-dip" characterized by a further slowing of growth. "The financial system remains weak in major parts of the world with 40 percent of anticipated write-downs of US-domiciled banks and 33 percent of potential losses in major European banks yet to be recognized and provisioned for," it pointed out. Fiscal balance Meanwhile, the World Bank said robust workers’ remittances reflect global staff restructuring induced by the worldwide recession, as well as the strong "value-proposition" of Filipino workers in the global labor market — a trend that will strengthen remittances this year. Money sent home by Filipinos abroad grew by almost a tenth to $1.4 billion in January from a year earlier, supported by the increased deployment of Filipino teachers, healthcare and service workers. (See: Money sent home by Pinoys abroad up by 8.5% in January) The report cited the resilient service sector and the gradual recovery of local industries in the last quarter of 2009 after three quarters of yearly decline — a trend that should strengthen the Philippine economy’s performance this year. "But generating inclusive growth that will uplift the living standards of the poor remains a fundamental challenge as poverty incidence is estimated to remain high following a series of shocks that hit the country," the World Bank’s Le Borgne said. Poor Filipino households, he added, could be affected further by the El Niño-induced dry spell. "A worse-than-expected El Niño could pose serious risks to the country’s growth prospects and trigger larger increases in hunger incidence," he pointed out. The World Bank report said the magnitude of the fiscal stimulus implemented by the government in 2009 had been unprecedented. The large fiscal stimulus, it said, had helped buffer economic activity in 2009, but it also pushed the National Government’s primary fiscal balance into its first deficit since 2002, the estimated public sector balance into its first deficit since 2005, and led to the highest debt-to-GDP ratio since 2003. "While the government aims to achieve fiscal balance by 2013, accompanying this commitment with detailed measures (and their likely timing and yield) and embedding them within a medium-term fiscal and… expenditure framework would be desirable," it added.