5 things that will keep the PH economy growing in next 10 years

Sustaining President Aquino’s reform initiatives will be key to keeping the Philippine economy growing above-trend.

MANILA – The Philippine economy can sustain its above-trend growth in the next 10 years provided that government reform continues, according to Capital Economics.

In a report, the research firm said Philippine gross domestic product (GDP) could grow between 6.5-7 percent over the next decade.

Philippine GDP grew by 7.2 percent last year, above the government target of 6-7 percent and the second-fastest in Asia next to China’s 7.7 percent. GDP is the amount of final goods and services produced in the country, and as such measures economic performance.

Capital Economics cites five factors working in the Philippines’ favor:

Reduced risk of external crisis,
Improvement in the fiscal position,
Healthy demographics,
Reform-minded government, and
Developing manufacturing sector.

“Overall, we remain fairly upbeat on the Philippines and believe growth will average around 6.5 percent to 7 percent over the next decade,” Capital Economics said.

Given the importance of sustained reform, a key issue will be who replaces President Benigno Aquino III once he ends his term in 2016, the research firm said.

“The election of another reform minded president would provide a major boost to the country’s prospects. However, there are clearly no guarantees this will be the case. Indeed, there is a danger that Mr. Aquino will be followed by weak, incompetent, or corrupt leader who fails to build on or even reverses, the progress the Aquino has made in his first few years as president,” Capital Economics said.

Among the most important reforms undertaken by the Aquino administration are a crackdown on corruption, new legislation to control population growth, public-private finance initiatives aimed at improving the country’s infrastructure, and a peace agreement with Islamic insurgent groups.

“Since becoming president in 2010, Aquino has made significant progress in improving the business environment,” Capital Economics said.

The report cited the reduction in the government debt to GDP ratio to less than 40 percent from a peak of under 70 percent in 2003.

With less money now being spent on debt repayment, the government has more resources to spend on infrastructure, education and healthcare, which raise productivity and drive long-term growth, Capital Economics said.

Moreover, a rapid increase in the working age population can boost growth by increasing the productive potential of the economy, provided jobs can be found for these people.

The number of dependents relative to workers — the so-called dependency ratio — continues to fall. This means the savings rate, which is unusually low, should start to rise.

The Philippine population of working age is expected to rise by over 40 percent from 2010 to 2030, according to United Nations’ estimates.

“Higher savings can support long-run per capita growth by increasing the pool of resources available for investments,” Capital Economics said.

Moreover, the Bangko Sentral ng Pilipinas (BSP) is seen to keep rates at a record low this year at 3.5 percent for overnight borrowing to support the reconstruction efforts following the devastating typhoon that hit the country last November. The impact of Typhoon Yolanda in inflation is seen temporary.

“We don’t think the BSP will be taking any undue risks with inflation by keeping rates so low for such an extended period,” Capital Economics said.

The lack of dependence on foreign financing, meanwhile, limits the country’s vulnerability to sudden capital outflows, thus allowing the BSP to keep rates low, the research firm said. –Maricel E. Burgonio, InterAksyon.com