The World Bank’s growth forecast for the Philippines’ upgraded to 6.5% this year, which is 2nd highest in the region for this year and 2023.
Despite a hawkish central bank and a pessimistic global economic outlook, the World Bank (WB) has improved its growth forecast for the Philippines for 2022 and 2023, citing an “accommodative” fiscal policy to recover domestic demand. The Washington-based lender raised the Philippines’ gross domestic product (GDP) outlook given last April from 5.7 percent to 6.5 percent based on its East Asia and the Pacific Economic Update for the month of October. This is the lower end of the government’s target range of 6.5 - 7.5 percent for this year. The World Bank projects the Philippines' economy to grow from 5.6 percent to 5.8 percent in 2023, which is still below the government’s 6.5-8 percent assumption for 2023. The Philippines' growth forecasts for 2022 and 2023 were higher than the Association of Southeast Asian Nations-5 (ASEAN-5's) average growth projections, at 5.4 percent and 5.1 percent, respectively. It was also above the East Asia and Pacific average of 3.2 percent for 2022 and 4.6 percent in 2023. The Philippines' growth forecasts are also the second highest in the region, just falling short of Vietnam's 7.2 percent and 6.7 percent growth forecasts for 2022 and 2023. World Bank East Asia Pacific Region Chief economist Aaditya Mattoo noted that the Philippines’ growth outlook improves to the rebound of private consumption as the economy reopened after the Covid-19 pandemic lockdowns. “It is also evident to us that the Philippines is one of the countries which saw reasonably good export performance. But even more than that, it’s the revival of both public and private investment, and some of that boost might have come related to the electoral activities in the region,” Mattoo said, also citing the revival of its tourism sector. “While some aspects of Philippine monetary policy may have been tight, its fiscal policy seems to us at least to be a little bit more accommodative,” he added. Since May, the Bangko Sentral ng Pilipinas (BSP) has increased interest rates by 225 basis points. The World Bank also noted that the output is expected to surpass pre-pandemic levels this year in the Philippines, Cambodia, and Thailand. It also emphasized that while sectors like information and communication technology, finance, and agriculture have been resilient, the output of transportation, accommodation, and catering sectors remains well below pre-pandemic levels in the Philippines, Malaysia, and Thailand. “In the Philippines’ case, there is also an interesting contrast,” Mattoo said. “That when it comes to agricultural policies, the Philippines has implemented significant liberalization and relied more on transfers in general than price subsidies. But when it comes to energy and fuel, it is less so,” the chief economist added. For 2022, the growth forecast is expected to moderate as pent-up demand is expected to eventually fade amid continued elevated inflation, while public spending is anticipated to slow down in view of the limited fiscal space. Economic slowdown
The current slowdown in global economic activity was pointed out as a downside risk to growth in the Philippines and the rest of the East Asia Pacific region. “A slowing growth of one percentage point in the rest of the world and China could mean growth in the region slowing down by more than one percentage point,” Mattoo said. The World Bank drop its growth outlook for the East Asia and Pacific region, which includes China, from 5 percent to 3.2percent based on the forecast in April. In 2021, the region expanded by 7.2 percent. The Chinese economy is already expected to down to 2.8 percent, from its previous forecast of 5 percent because of the "Zero-Covid" policy. China expanded by 8.1 percent in 2021. “Even though tourism is reviving, supporting growth in countries like Thailand, the Philippines, and many Pacific Islands, the global economic slowdown is dampening demand for the region’s exports,” the World Bank said. The World Bank also pointed out that in the Philippines inflation rate which has averaged 4.9 percent in the first eight months to August, is still higher than the central bank’s goal range of 2-4 percent. “Food prices have increased considerably in Indonesia, Malaysia, the Philippines, and Thailand during the last few months and appear to be the major contributor of higher inflation,” The World Bank added, also noting the rise in energy prices in the Philippines, as well as in Thailand and Vietnam. Mattoo emphasized the following increase in interest rates by several central banks, especially the US Federal Reserve, caused capital outflows and depreciated currencies in the region. In the year to date ending September 27, the peso has depreciated by 15.66 percent, or ₱7.99, from its ₱51 a dollar close last year. “The combination of higher interest rates and depreciating currencies means that the burden of debt is increasing,” he said. The Philippines’ debt-to-GDP ratio stood at 62.1 percent as of end-June, above the 60 percent threshold prescribed by multilateral lenders. “On average, primary deficits have contributed to increasing public debt-to-GDP ratio by 1.1 percentage points. The historical patterns observed in most East Asia Pacific countries suggest that relying on fiscal consolidation as a policy option to deal with high debt to GDP would be challenging,” the World Bank said, noting how previous fiscal consolidations contributed to lower debt-to-GDP ratios in the Philippines, among other countries. The World Bank cited that the Philippines’ fiscal balance posted a deficit of 6.5 percent which is lower compared with 7.8 percent in the same period last year. It resulted due to higher tax collections and a windfall from oil excise taxes. It added that before the pandemic, the Philippines’ negative primary deficit helped to a 1.9-percent decrease in debt-to-GDP. While dollar-denominated debt is just 10 percent of all debt in the Philippines, most of it is shouldered by the private sector, which is another risk in itself. “Firms in Indonesia, the Philippines, and Vietnam have a greater share of maturing debt in the form of syndicated loans than in bonds, and at least 60 percent of the debt coming due is denominated in foreign currency, making the firms particularly vulnerable to exchange rate depreciations,” the World Bank said. Meanwhile, Mattoo pointed out that foreign direct investments can still be a source of growth for the region, as it has been before. “The kind of reforms we have seen in Indonesia and are seeing in the Philippines are definitely going to see a lot of investment creation,” he said. “There are new areas, like the utilities and the various infrastructure services, in the Philippines and in Indonesia; especially the green transition throughout the region. I think those are going to draw in a lot of new investment," he added.