ADB forecasts below potential growth for RP

Philippine economic growth is expected to go below potential this year given a tentative recovery and more than usual uncertainty brought about by a change in the country’s administration, the Asian Development Bank (ADB) said on Tuesday. In its flagship economic publication, Asian Development Outlook 2010, the multilateral bank forecast 3.8 percent growth for the Philippines this year — within the government’s 2.6-3.6 percent goal but under the 5.5-percent average rise posted in the last five years before the US-led global downturn in 2008. The Philippine forecast is also way below the 7.5-percent outlook for developing Asia and 5.1 percent for Southeast Asia. Growth would likely accelerate to 4.6 percent next year, when a stronger global recovery is expected to give impetus to exports and remittances, the ADB said.

"The outlook assumes that there is a smooth political transition in 2010 following presidential and legislative elections scheduled for May, and that the new government pursues credible economic and fiscal programs," the ADB said in its latest report. University of the Philippines economist and former Budget Secretary Benjamin E. Diokno said the ADB forecast is too optimistic, adding that the study might have been conducted before the power crisis in Mindanao erupted. "I think 3.8 percent sits on the high side considering the effects of El Niño and the energy crisis... I am leaning towards 2.8-2.9 percent growth this year," he told GMANews.TV. He also expects growth to pick up to 4 percent next year, even as he cited the risk of another global slowdown as the impact of stimulus packages wane. Diokno added that money sent home by Filipino workers abroad have been increasing not because their pay has increased but more because they need to send a bigger amount given the peso’s strength against the dollar. "They draw on their savings abroad, while some of them are really coming home for good," he said, adding that the social cost of remittances is too high. "In the future, we may still encourage working abroad but as a choice, not because there are no jobs at home," the economist said. On the other hand, University of Asia and the Pacific economist Victor A. Abola said the Philippines could do better than the ADB forecast given improved economic benchmarks particularly in the US. "The US was losing jobs until a month ago. Based on the latest data, they were adding 100,000 more. So far, all the benchmarks have been okay except for housing," he said in a phone interview. Abola expects the economy to grow by 4.3 percent this year and by nearly 5 percent next year. "My original forecast for this year was 3.8 percent. However, I have revised it upwards because the recovery in the US is now stronger than I had expected." Fiscal risk In its report, the ADB said this year’s growth forecast for the Philippines is subject to more uncertainty than usual since the incoming administration’s economic and fiscal policies will have an important bearing on the country’s growth momentum. "Fiscal policy will likely be less stimulative in 2010, given budget constraints and plans by the current administration to trim the fiscal deficit to 3.5 percent of [the gross domestic product]," the bank said. It noted that while spending on social services would rise, the amount set aside for infrastructure is still lower than last year. It also cited risks on the revenue side following tax exemptions approved early this year and additional tax breaks proposed, even though the country’s low tax collection had been a "chronic constraint" on the budget. "Significant fiscal slippage could unsettle financial markets and raise the country’s risk premium. It will be important [for] the new government [to] commit to a medium-term plan to strengthen the fiscal position," it pointed out. The ADB said monetary policy would support the recovery, while the central bank gradually withdraws liquidity-boosting measures put in place at the height of the global financial crisis. Private consumption would likely remain the main growth driver in the next two years, underpinned by money sent home by Filipino workers abroad, a firmer labor market and stronger consumer confidence. "Election-related spending will provide a boost through May. Exports will grow in line with the global recovery and, on a net basis, are expected to contribute modestly to GDP growth," it added. Meanwhile, the ADB expects investments to rebound from last year’s low levels now that the global and domestic outlooks have improved, although businesses might remain cautious until the May elections. Services, the Manila-based bank said, would benefit from stronger growth in private consumption and election-related spending. Trade with the rest of the world will likely pick up and stimulate growth in wholesale trade, storage and transport. Manufacturing is projected to recover gradually in tandem with the improvement in external demand, particularly for electronic products, it pointed out. Aside from the fiscal gap, the ADB also cited the impact of an El Niño-induced drought on agriculture, as well as a slower-than-projected global economic recovery as risks to the forecasts.