The Philippines: On course for higher growth

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A combination of strong consumer demand, increased state investment and sound monetary policy have combined to put the Philippines’ economy on course for a strong performance this year, leading analysts and financial institutions to revise their growth forecasts upwards to near 5%.

While some risk factors remain, such as the possible impact of a prolonged slump in global markets, observers are confident that the move to make funds available for the country’s infrastructure development will steady fluctuations in business confidence and prevent a repeat of last year’s lower-than-expected growth of 3.7%.

In a research note issued on April 8, Singaporean financial services firm DBS Group said while increases in public funding often gave cause for concern, it regarded the development as a positive step for the Philippines that should pave the way for growth.

“In the case of the Philippines, this is a welcome relief as it implies that the budget disbursement bottleneck has probably been cleared,” the firm said. “An expected acceleration in government spending in 2012 is a key reason why we see growth higher this year as compared to 2011.”

Speaking at the end of March, the governor of the Bangko Sentral ng Pilipinas (BSP), Amando Tetangco Jr, told an investment conference that he believed the Philippines could sustain a wave of growth even if the global economy remains fragile.

“This is not a false start, the Philippines has indeed come on its own,” he said. “The growth story is not a fluke, it is the result of a series of reforms, reforms that were critically thought of and well executed.”

His confident outlook reflected the findings of an international survey by consultancy firm Grant Thornton International that showed business confidence in the Philippines ranked among the highest globally. The results, which were released on April 9, indicated that 82% of businesses were positive about prospects in the Philippines for the coming year, up from 74% three months previously.

Business confidence received a further boost on April 11 when the Asian Development Bank (ADB) revised its growth forecasts, saying it now expected GDP to reach 4.8% this year.

With inflation remaining below the central bank’s target range of 3-5% for the year, and a year-on-year fall in the consumer price index (CPI) for March from 2.7% in 2011 to 2.6% in 2012, some analysts have suggested that the BSP may decide to relax its monetary policy slightly. The BSP has so far lowered its benchmark rates twice this year, with the latest cuts announced at the beginning of March, taking the bank’s overnight borrowing rate to a record low of 4% and its lending rate to 6% after a 25 basis-point reduction.

Emilio Neri Jr, an economist with the Bank of the Philippine Islands, suggested in a commentary on April 4 that the BSP could consider a further shift in its rates policy. “Besides the manageable inflation path, recent economic reports show continued improvements in the economy, and most analysts who have been very pessimistic about the outlook for the Philippines are now raising their forecasts for full-year growth to closer to 5%,” he said.

Although the government has factored in a 2.6% budget deficit for this year, increased revenues look likely to offset higher spending, with the budget posting a $250m surplus for February. An economist at DBS Group, Eugene Leow, told ABS-CBN news on April 3 when the figures were issued that the monthly surplus – the first since mid-2011 – signalled well for the Philippines’ fiscal position.

“Considering that government spending has only started to ramp up over the last few months, the lower overall deficit for January to February suggests that government spending to support the economy can continue without deterioration to fiscal conditions,” he said.

While most indicators for the country’s economic performance are positive, the potential to under-achieve once again still remains. Some observers fear that global economic uncertainty could weaken demand for Filipino goods and services and reduce remittances from overseas workers. They also highlight the important role earmarked for the state in sticking to its pledge to keep investment channels open and ensuring key infrastructure projects meet target launch dates.

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