MANILA, Philippines - The Asian Development Bank (ADB) has upgraded its growth forecast for the Philippine economy this year to 3.8 percent, from an earlier estimate of 3.1 percent, driven by increased private consumption on the back of robust remittances and election spending.
In the latest Asian Development Outlook (ADO) 2010, the ADB’s flagship annual economic publication reported that from a very weak 0.9 percent growth in 2009, the country’s gross domestic product (GDP) will recover significantly to expand 3.8 percent and 4.6 percent in 2010 and 2011, respectively.
However, the ADB said the Philippines still needs to seriously address several constraints to growth if it is to reach its full potential. The growth forecasts remain below both potential growth and average growth (5.5 percent) during 2004-2008, the report pointed out.
“The new administration’s economic and fiscal policies will have an important bearing on the momentum and the quality of growth,” said Neeraj Jain, country director for the ADB’s Philippine country office. “The global financial crisis and adverse weather conditions have increased the risks to attaining the Millennium Development Goals in the Philippines exacerbating challenges facing the policy makers.”
But the ADB said investments are forecast to rebound from last year’s low levels, while external trade will be considerably stronger this year. Exports will also grow in line with the global recovery.
While the trade deficit will persist, the multilateral lender said higher remittances and business process outsourcing (BPO) income will swing the country’s current account into surplus.
The ADO 2010 also foresees less-stimulative fiscal policy in 2010, given the budget constraints and plans by the current administration to trim the fiscal deficit to 3.5 percent of GDP. The Bangko Sentral ng Pilipinas is expected to gradually unwind liquidity-boosting measures put in place during the global financial crisis.
The report warns that the Philippines has been investing less in social sectors and infrastructure than most of its neighbors, partly due to the tight fiscal situation, high public debt, and poor business climate.
It noted that fiscal resources are severely constrained by weak revenue generation. Tax revenue as a share of GDP is lower than most of its neighbors, and declined to 12.8 percent in 2009 due to the economic slowdown and the erosion of the tax base due to tax exemptions.
“Reversing the structural erosion of the tax base and reducing the size of the government deficit to increase budgetary resources for development expenditure will require renewed efforts at tax reforms by the new administration,” said ADB chief economist Jong-Wha Lee.
The ADB urged the rationalization of fiscal and investment incentives, as well as the indexing of excise taxes to inflation as part of the measures needed to strengthen the country’s fiscal situation. It also called for enhanced tax administration, including a crackdown on tax evaders and enforcement of anti-corruption programs in tax and customs agencies.
“Higher private investment is also needed to upgrade infrastructure and more generally, the productive capacity of the economy. Sluggish private investment reflects infrastructure deficiencies, particularly in power and transport, and weaknesses in governance and the policy climate,” the report added.