Philippine economy on steady course

Business Quarterly, a periodic bulletin that highlights key macroeconomic and industrial developments produced by the Institute for Development and Econometric Analysis, Inc. (IDEA), said that the Philippine economy is on a steady course. 

The Philippines maintains its GDP baseline growth forecasts for 2012 at 5.9 percent; baseline forecasts of 5.4 percent and 5.2 percent for the next two years, respectively, are likewise preserved.

Internally according to IDEA, household consumption remains strong while government spending is expected to readily offset the dampening effect of weak investment. Meanwhile, the situation in the US and Europe remain not conducive for advancing exports.

On the production side,  IDEA states the Services and Industry sectors are on track in achieving the annual baseline growth forecasts of 6.7 percent and 6.5 percent, respectively, in 2012. On the other hand, agriculture is poised to maintain a 0.6-percent growth in 2012 counting on the better weather scenario. However, for the most part, the possible external threats to economic growth remain the same. There is reason to believe, however, that the domestic economic picture may also deteriorate if certain issues remain unaddressed.

Furthermore, according to same published report, the greatest external risk remains to be the possibility of default in the euro zone and its vast implications for financial markets and the global economy. Growth remains weak, if not faltering, in many of the industrialized countries. As such, the Philippines and other countries cannot count on external demand for their goods and services and will have to rely on domestic economic activity. Moreover, there are still geopolitical risks in the Middle East, particularly unresolved tensions with Iran over its nuclear activities; territorial disputes in Asian waters, as exemplified by China and Japan’s souring economic relations; and the uncertainty caused by upcoming midterm elections in the US.

Likewise, partly on account of strong capital inflows to promising emerging economies like the Philippines and also partly due to tolerance for a strong exchange rate policy by monetary authorities, the Philippine peso has been appreciating and is expected to remain strong as the US embarks on “unlimited quantitative easing” and many central banks opt to keep interest rates low.

Accordingly, IDEA expects the peso to US dollar exchange rate inches to settle around Php42.54/US$1 in 2012, Php41.99/US$1 in 2013, and Php41.68/US$1 in 2014, stronger relative the dollar than previous forecasts.

Lastly, while government spending and public construction have picked up markedly compared to last year, a good part of the picture can be attributed to base effects coming off from very low levels last year. The fact is that the government continues to underperform relative to its spending targets and is unlikely to meet the full-year spending target.

Moreover, as spending recovers from the low base in 2011, it will become more difficult for the government to sustain the currently high growth rates in spending.

Failure to meet spending targets will also have implications on long-term growth prospects as infrastructure remains to be one of the country’s weak spots, according to IDEA.