Philippines: Growth from within

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Philippines: Growth from within

Philippines: Growth from within

Asia Pacific Economic Outlook, October 2012

Strong domestic consumption and investment are expected to drive growth and offset a decelerating export sector. The government will likely continue to increase spending on infrastructure.

The Philippine economy is expected to expand at a modest pace of around 5.5 percent this year. While external headwinds will weigh on exports, domestic dynamics remain favorable. Private consumption, which accounts for about 70 percent of GDP, is expected to be the main driver of growth. Household consumption has received a push in recent quarters from wage increases as well as conditional cash transfers from the government. However, subdued economic conditions abroad will likely have a negative impact on remittances from Overseas Filipino Workers (OFW), which are an important driver of household consumption. Even though private consumption will likely moderate, growth at a healthy pace of over 5 percent is expected this year, due to resilient fundamentals.

Along with private consumption, government consumption and investment is also expected to boost economic growth. Government spending is expected to rise substantially under the flagship Public Private Partnership program. The government’s initiative to encourage infrastructure development will likely also spur private investment in the economy; gross fixed investment is forecasted to rise by about 8.5 percent this year. The government traditionally falls short of its expenditure targets, but it seems that some progress has been made this year. During the first eight months of the year, government expenditure was already up 14.5 percent from last year.

As the government expects increased expenditure, forecasts suggest that its fiscal deficit could expand to around 2.6 percent of GDP. While the government is planning to raise funds from the capital markets toward the end of the year, it is also hoping to collect higher tax revenue through proposed modifications to mining regulations and the tax on tobacco and alcohol.

The government believes that it is not recovering its fair share from mining tax revenues. It is estimated that in 2011, tax collected from the mining industry was $47 million, accounting for just 0.17 percent of total national tax collection. Aside from boosting revenue, the executive order on mining was intended to simplify complex investment regulations and protect the country’s natural resources. However, since the executive order was released in August, it has done little to clarify investment rules and has come to face strong opposition from the mining industry. Meanwhile, the government’s proposed changes to the inflation-indexed excise taxes on tobacco and alcohol have also run into roadblocks. The government’s proposed bill, which could increase revenue by an estimated $700 million, is currently held in the upper house of the Parliament. While the fate of the bill is uncertain, an increase in the price of tobacco and alcohol could exert upward inflationary pressures.

To reiterate the central bank’s view, strong domestic consumption and investment are expected to be the key drivers of growth this year.

Inflation in the Philippine economy is already accelerating. In August, inflation surged 3.8 percent, up from 3.2 percent recorded during the previous month. The recent strength in global commodity prices prompted the central bank to increase its annual inflation forecast to 3.4 percent from its previous estimate of 3.1 percent. However, despite the upward revision, inflation is expected to remain in the central bank’s target range of 3–5 percent. Since the rate cuts at the beginning of the year, the central bank has refrained from loosening monetary policy because it believes the economy is healthy enough to grow without a monetary stimulus. Monetary policy is also expected to remain supportive of investment by avoiding further reductions in interest rates. Interest rates in the Philippines are already at historic lows, and more cuts may not improve consumption as much as it would hurt foreign direct investment and price stability.

To reiterate the central bank’s view, strong domestic consumption and investment are expected to be the key drivers of growth this year. This will likely offset the slowdown in the export sector. Moreover, the government will likely continue to support consumption and increase spending on infrastructure. All these factors are expected to result in the economy growing at a modest pace of around 5.5 percent this year.

Philippines: Growth from within
Cover Image by Stephanie Dalton
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