Good and bad news on economy

THE World Bank says the Philippine economy will grow by 1.4 percent this year despite the global economic crisis that pushed many countries into recession, but warns the destruction caused by three recent storms will push more than a million Filipinos into poverty.

The bank also projects that the Philippines’ gross domestic product will expand by 3.1 percent in 2010 in its report, Transforming the Rebound into Recovery: East Asia and the Pacific Update.

“The economy weathered the global crisis comparatively well, escaping a recession, thanks in large part to timely fiscal and monetary stimulus measures and the continued steady inflow of remittances,” the Bank says.

But challenges will block sustainable growth.

“Fiscal consolidation is needed to protect and increase priority spending in health, education, and infrastructure, and to help reduce government debt to levels that will open up more fiscal space for the future,” the bank says.

The global economic recession will leave an additional 1.4 million Filipinos in poverty by 2010.

“Damage and losses inflicted by [tropical storm] Ondoy and [typhoon] Pepeng are estimated to worsen poverty incidence even further,” the report says.

Manila now faces the challenge of balancing the need to avoid a premature withdrawal of fiscal stimulus with ensuring medium-term fiscal consolidation.

The Bank expects the fiscal deficit to hit 3.8 percent of GDP this year against the government’s 3.2-percent target.

The Bank sees developing East Asia growing 6.7 percent this year and 7.8 percent the next, led by an 8.4-percent expansion in China this year and 8.7 percent next year.

Excluding China, developing East Asia is projected to grow by only 1 percent in 2009, slower than in South Asia and the Middle East and North Africa, and only slightly stronger than in Sub-Saharan Africa.

GDP is contracting in Cambodia, Malaysia and Thailand, and is barely growing in Mongolia and some of the Pacific Islands, the report says.

This year, Malaysia is expected to contract by 2.3 percent and Thailand by 2.7 percent. But Indonesia is expected to grow by 4.3 percent and Vietnam by 5.5 percent.

Looking beyond 2009, Vikram Nehru, the World Bank’s chief economist for the East Asia and Pacific region, says countries in the region can still grow rapidly even if growth in the advanced economies is slow.

Countries must resist protectionism, remain open and become more and not less integrated with the regional and global economies to take advantage of the growth potential ahead, Nehru says.

“Moving up the value-added chain in global and regional production networks should lead to further productivity gains and strong growth, and allow for new technologies and innovation to spread more widely through the region’s economies,” Nehru says.

The report’s lead author, Ivailo Izvorski, says the economic the crisis has helped governments realize that more growth can be extracted from domestic demand if incentives that have limited expansion in private consumption and services are tackled.

“Rebalancing growth need not be presented as a choice between relying on global markets or on domestic markets,” Izvorski says.

In the Philippines, the report says, the remarkable resiliency of remittance flows has been surprising. In real peso terms, remittances rose 12 percent in the year to August 2009 after contracting by 2.9 percent in 2008.

It says the strong deployment of workers abroad in 2008 and an extensive diversification of Filipino workers, whether by geographic location, skills, gender, or sectors of activity, help explain the resiliency of remittances during the global crisis.

Remittances are also expected to play a strong insurance role for families affected by the typhoons that hit the Philippines.

But the fiscal deficit has widened substantially because of the fiscal stimulus package calling for earlier spending and noticeably weaker-than-expected revenue.

Low inflation and a stable exchange rate helped the Bangko Sentral cut its key policy rate by 200 basis points this year, but the pass-through to bank lending rates has been slow and partial, the report says.

Inflation declined to 0.1 percent in August from a peak of 12.5 percent a year earlier. Bank lending rates fell only 120 basis points this year. –Roderick T. dela Cruz, Manila Standard Today