ADB trims RP growth target to 2.7% this year

The Asian Development Bank (ADB) has reduced its growth forecast for the Philippines from an original 3.1 percent to 2.7 percent mainly due to the Sept. 11 attacks on the US and subsequent US military strikes in Afghanistan.

For next year, the Philippines’ gross domestic product (GDP) is forecast to grow by three percent, the ADB said.

Dr. Gunther Hecker, ADB director for Philippine affairs said the Philippines has been badly affected by the weakening of the US economy, the Japanese recession, and the prolonged decline in the information, communications and technology sector.

Hecker said the biggest concern is the ability of the country to hit its deficit target of P145 billion, or four percent of GDP, this year. The deficit in the first seven months of the year was P11 billion better than target.

However, the ADB director expressed concern over the continued funding of the deficit buoyed mainly by expenditure cuts rather than increased revenue collections. In the medium term, fiscal consolidation will only be sustainable if it comes from enhanced revenue-raising measures.

"Hitting deficit targets are a litmus test viewed by foreign investors and funding agencies."

ADB forecasts inflation at 6.3 percent this year and 5.5 percent next year while the current account surplus is expected to narrow to 4.9 percent of GDP in 2001, due to a smaller trade surplus, reduced numbers of tourists due to security concerns, lower worker remittances, and higher net interest payments. The current account surplus is forecast to narrow further to 4.5 percent of GDP in 2002, as import growth continues to outpace exports, ADB added.

"The global economic slowdown has led to a sharp decline in exports, although relatively robust domestic demand has partially offset this fall in the Philippines," the ADB said. "GDP growth in the rest of the year is likely to be weighted down by continued external sector weakness and decisive measures are needed to improve public finances if growth is to be sustained in the medium term."

Fairly firm domestic demand helped offset the weak export performance on the first half, resulting in year-on-year GDP growth of 3.3 percent, according to the ADB.

Hecker noted that weakness in next exports, stemming from the US slowdown and global electronic demand slump has been balanced to some extent by a pickup in public investment and continued steady growth in private consumption.

Agriculture also helped underpin first half growth, with a favorable weather, rehabilitation of irrigation canals, and improved technology, lifting agricultural output 3.0 percent year-on-year, compared to 2.3 percent growth in the first six months of 2000.

The ADB noted efforts by the Bangko Sentral ng Pilipinas (BSP) to stimulate demand and growth by trimming its overnight interest rates for much of this year.

Following some further weakness in the local currency in June and July, monetary policy was tightened slightly but an improving inflationary outlook and rate cuts by the US Federal Reserve have once again provided the central bank with greater flexibility to reduce interest rates. While fiscal and monetary policies would be used to support the local economy, the large public debt burden, relatively high inflation, and exchange rate volatility constrain the extent to which counter-cyclical policies can be used to stimulate domestic demand.