The Philippines: Reduced forecast

Although the Philippines economy looks set to grow in 2011, it seems likely that the rate of expansion will be less than that recorded over the past year or so, with both international and domestic factors weighing on growth momentum.

Annualised GDP growth fell to 4.9% during the first three months of 2011, the third successive quarter to post a decline in the rate of expansion. This deceleration will make it difficult to achieve the 7-8% growth target set by the government for 2011. However, first quarter results are in line with a new forecast from the World Bank, issued in early June, which projected a 5% increase in GDP for this year, followed by 5.4% in 2012.

Filipino officials have blamed much of the recent slowdown on global factors, including the March earthquake in Japan, political unrest in the Middle East and the US economy failing to rebound as quickly as expected.

However, some analysts have also pointed to the sluggish flow of state funds being pumped into the economy, with a number of big ticket programmes behind schedule and others not due to go into effect until later this year. Metrobank recently cut its projection of annual GDP growth to 5%. The bank’s previous forecast of 5.7% was based on strong personal consumption expenditures, business spending and continued pump-priming by the state.

“However, it looks increasingly clear that the last part didn’t happen as planned since government spending actually dropped from year-end 2010,” Marc Bautista, the head of research at Metrobank, said in a weekly report released at the beginning of June

Along with a slowing of the economy, there has also been a widening of the trade deficit. As of the end of March, exports stood at $12.2bn, well short of the $15.58bn paid out for imports.

The government is looking to bridge the trade gap and make the economy less vulnerable to external shocks. By building trade relationships with non-traditional partners, the Philippines may be able to mitigate the adverse impact of shocks in the future, the country’s socio-economic planning secretary, Cayetano Paderanga, said on May 26.

“This means that the country should be able to diversify its suppliers and exports markets in order to reduce reliance on its current markets,” he said.

One way that the Philippines can diversify its overseas markets and reduce its trade deficit is to strengthen its services sector, building on its already solid performance in business process outsourcing (BPO) while also further developing other service segments.

This advice came from a World Bank draft study, entitled “Exporting Services: A Developing Country Perspective”, that was discussed at a conference on the global trade in services held in Manila on June 6. Service exports accounted for 9% of the Philippine’s total exports in 1999, growing to 21% in 2010. During this same period, services exports also increased on average by 3.6% per year, more than double the rate for the rest of Asia. Estimates put the export earning of the BPO industry at around $9bn last year, a figure expected to almost treble by 2016.

While lauding the achievements in the BPO sector, the World Bank said that the Philippines needed to do more to develop its tourism industry, which would help create employment and alleviate poverty. According to the draft study, major impediments to tourism competitiveness are largely the result of poor transportation infrastructure, which reduces accessibility to tourism destinations and discourages private sector investments.

While the BPO sector is on the rise, so too are prices across the economy. The inflation rate reached 4.5% as of the end of May, an increase over the 4.3% reported for April. The May figure is still at the bottom of the range targeted by the Bangko Sentral ng Pilipinas (BSP), the central bank, but the BSP’s governor, Amando Tetangco, said on June 6 that there remained the risk of further inflationary pressures.

“This calls for continued close monitoring of possible sources of inflationary impulses and their likely impact on future inflation and inflation expectations to ensure that the monetary policy stance is consistent with the price objective,” he said.

The BSP has also said it could consider raising interest rates at its next monetary policy meeting in mid-June to reduce domestic demand, although the government might prefer rates to stay low for a while longer to help stimulate flagging growth.

Although it is probable that the government will have to revise downwards its ambitious goals for economic growth, at least in the short term, economy will continue to expand at a healthy clip. Moderation in growth may in fact help to ease inflationary pressures, which would provide a calming effect on price expectations This sound position should provide an opportunity to make further investments and build an even stronger platform for future expansion.