Forecasts cut by World Bank

THE WORLD BANK has joined other multilateral institutions in trimming growth forecasts for the Philippines, citing a weaker-than-expected first half and renewed global turmoil.

The country’s strong fundamentals, however, are limiting the impact on the economy, the Washington-based institution said in a quarterly update released yesterday.

“In response to the slower growth and the weaker economic outlook in advanced economies, we revise our growth forecast downward from 5.0% to 4.5% for 2011 and from 5.4% to 5.0% for 2012,” the report states.

These compare to the government’s 7-8% target for both years and downward revisions announced last month by the Asian Development Bank (4.7% and 5.1%, from 5.0% and 5.3%) and the International Monetary Fund (4.7% and 4.9%, from 5.0% for both years).

“To better insulate the Philippine economy from external shocks, it is important to maintain strong macroeconomic fundamentals and improve its competitiveness through diversifying exports, strengthening domestic competition, and improving productivity of the services sector,” World Bank economist Soonwha Yi said in a statement accompanying the update.

The report noted that the country’s external position and macroeconomic fundamentals remained strong. In particular, the current account surplus was said to have increased by 20% in the second quarter, net foreign direct investments were up in the first half and “foreign reserves have surged to record highs.”

Monetary policy was also described as remaining accommodative, and the deficit likely to fall below target. The World Bank noted, however, that the state underspending behind the better fiscal balance “also reduces economic growth and could waken potential growth as the country’s large deficiencies in infrastructure remain unresolved.”

The challenge for the government, it said, “is to ensure that the Philippines continues to improve its competitiveness, while cushioning the economy from adverse external shocks.” The World Bank recommended accelerated public spending, which can be supported by raising more revenues via improved tax administration and reforms.

Ruperto P. Majuca, assistant director-general for planning at the National Economic and Development Authority, agreed with the report’s recommendations, saying the Philippines can “pursue Asian integration, and take advantage of China rebalancing.”

“You also strengthen the domestic demand by government spending, e.g., by infrastructure spending, then other domestic sector strengthening [for example through] CCT (conditional cash transfers) [and] tourism,” he explained in a text message.

Mr. Majuca, however, thinks that “the forecasts are low.”

“We expect GDP growth to pick up in H2 (second half) relative to H1 due to the acceleration of government spending, the effect of Japan normalization and reconstruction on the Philippine economy, seasonal boost, and the absence of base effects which characterized H1,” he said.

University of Asia and the Pacific economics professor Cid L. Terosa, for his part, said the World Bank “forecast reflects the cautious mood that is prevailing in the economy and will prevail next year.”

“I think [economic growth] will be 5% or below in the next two years,” he added.

Benjamin E. Diokno, former Budget secretary and economics professor at the University of the Philippines, said the multilateral bank’s forecast downgrading was “not surprising.”

“The cut in growth forecasts which has come one after another in the last few weeks is not only realistic and timely; it also calls for a greater sense of urgency and creativity on the government’s spending performance,” Mr. Diokno said in an e-mail.

“There is greater urgency for the government to spend on labor-intensive, quick-disbursing, and rural-based projects in order to create jobs in the countryside where a great majority of the poor reside. Since the poor consume what little money they earn, it will increase consumer spending. With higher spending and high multiplier effect, there will be greater economic activity,” he added. — A. E. Barrameda, Businessworld