ADB Raises Inflation Projections, Trims Growth Forecasts for Philippines

The Asian Development Bank (ADB) has downgraded its economic growth forecasts and raised its inflation projections for the Philippines.

The Asian Development Outlook 2008 Update (ADO Update) forecasts that the economy will expand by 4.5% this year and 4.7% next year, down from 6.0% and 6.2% projected in April. The report says that high prices of food and oil have combined to push up inflation and undermine consumer spending.

“Two of the economy’s main growth drivers, private consumption on the demand side and services on the production side, have lost momentum,” says the ADO Update.

In 2007, the report says, private consumption grew by about 6%. This year, growth in household spending eased to 5.2% in the first quarter, and slowed to 3.4% in the April-June quarter as inflation accelerated.

The financial services, retail trading, and transport and communications sectors have all been hit by the drop in consumer spending. Growth in the services sector eased to 5.4% in the first half of 2008, down 3 percentage points from the previous year, the report says.

The ADO Update warns that employment creation remains insufficient despite several years of above 5% economic growth. The unemployed and underemployed accounted for 27.8% of the workforce in April 2008, up from 26.3% the previous year.

“A lack of productive employment opportunities within the country is one reason that a rising number of Filipinos (8.7 million at the end of 2007) work abroad,” the report says.

Consumer prices climbed by 7.6% in the first six months of 2008 and inflation continued to accelerate, hitting a near 17-year high of 12.5% in August. The Bangko Sentral ng Pilipinas (Central Bank of the Philippines) responded by starting to raise the interest rates in June.

The report forecasts that inflation will increase to 10.5% in 2008 and 8.0% in 2009, which is significantly higher than the ADO 2008 April forecast of 4.0% and 3.6% respectively.

Projections for the current account surplus are revised down significantly on account of widening trade deficits.

The government has implemented a fiscal stimulus package to help vulnerable groups cope with rising prices of food and other essentials. Spending on social services and infrastructure has also increased.

The ADO Update emphasizes the need for the government to expand the tax revenue base.

“Efforts to strengthen tax revenues will need to be stepped up to fund higher spending, particularly if weak global financial markets make it more difficult to achieve targeted privatization receipts,” the report notes. “Higher revenue growth is required over the medium term to achieve both fiscal consolidation, which is a key to maintaining global investor confidence, and to pave the way for greater spending on infrastructure and social services.”