Structural reforms, political instability hinder RP growth

Minimal structural reforms, political instability and continued dependence on imported fuel are among the major factors stifling the Philippines from moving as fast as its regional neighbors, according to the study conducted by Asian Development Bank (ADB).

The ADB study, entitled Asia Economic Monitor (AEM) report, noted that investments remain constrained by limited progress in structural reforms, such as in the power sector.

"Continuing remittance flows and restrained import expansion should keep the current account in surplus, while average inflation from January to June 2006 reached 7.1 percent, mainly due to high fuel prices and the recent VAT increases," the ADB said.

Nevertheless, the AEM said the Philippine economy remains resilient and growth should be sustained at about five percent in 2006 despite the uncertain investment climate, monetary tightening, and high oil prices. "Inflation, however, could still hover around seven percent, requiring continued vigilance."

It warned likewise of a possible slowdown in remittances that would crimp consumer spending and an abrupt correction in global payments imbalances that could reduce export growth and further erode investment.

"Heightened global financial uncertainty would likely reduce capital inflows, create current instability, erase recent gains in foreign reserves, and increase the sovereign spread on external debt," the ADB report added.

The ADB-sponsored report said that after three successive 25 basis point increases in the policy rates in 2005, the Bangko Sentral ng Pilipinas (BSP) maintained its policy rates in early 2006 based on evidence that current and expected inflation is decelerating. "Policy rates will likely remain stable in the months ahead," it said.

The report said that regional financial markets were volatile in the first half of the year influenced mainly by US Federal Reserve rates.