By Elijah Joseph C. Tubayan, September 27 2018; Business World


Image Credit to Asian Development Bank (ADB)

THE ASIAN DEVELOPMENT BANK (ADB) has slashed its Philippine economic growth projections for this year and 2019 following “stagnant” performance in agriculture and a merchandise export slowdown, even as investments continue to rise.

The regional lender revised downwards its Philippine gross domestic product (GDP) forecast to 6.4% in 2018 and 6.7% in 2019 in its Asian Development Outlook Update published on Wednesday, from 6.8% and 6.9% in its April report.

If realized, this year’s growth would be slower than the actual 6.7% clocked in 2017 and would fall short of the government’s 7-8% target.

But while the Philippines “faces the largest downward revision to its growth forecast for this year — by 0.4 percentage points — followed by Malaysia by 0.3 points, the Lao PDR, Myanmar and Vietnam by 0.2 points and Indonesia by 0.1 points,” it should still “post strong growth both this year and next,” the report read.

Contributing to next year’s pickup, the report added, would be acceleration of state spending on infrastructure and social services, while “[t]he recent buildup of inflationary pressure should moderate next year as tighter monetary policy reins in inflation expectations.”

Clarifying that this year’s projection of “6.4% is still a very robust economic growth rate,” ADB Country Director for the Philippines Kelly Bird said in a press conference on Wednesday at the ADB headquarters in Mandaluyong City that the new 2018 projection was “in line with the Philippine long-term growth and it’s driven by investments.”

“And because it’s driven by investments, we also believe that economic projection for next year is around 6.7%,” Mr. Bird said.

“That would be driven by investment and we expect that to further pick up due to a lot of flagship projects under the government’s ‘Build, Build, Build’ program that will start to come on stream next year.”

The Malacañan Palace issued a statement after the report was released, saying: “We expected this slowdown vis-à-vis our growth target for the year, given that certain policy decisions — such as the closure of Boracay and the full implementation of our comprehensive tax reform package which would benefit the country in the long-run — contributed to the deceleration.”

“We assure the public that our macroeconomic fundamentals are resilient, strong and stable,” it added.

“Our economic managers are committed to the country’s long-term vision and are swiftly addressing issues affecting our growth prospects to sustain high growth and make it inclusive.”

Noting continued growth of importation of capital goods and infrastructure spending, Mr. Bird pointed out that the country’s fixed investment-to-GDP ratio reached 27.2% last semester — the highest in over two decades — “laying the foundation for sustained growth over the medium term.”

The economy grew 6.3% last semester versus 6.6% in 2017’s first half, weighed particularly by flat farm performance and slowed increase in household spending that nevertheless fueled nearly 70% of GDP.

ADB’s projections for the Philippines are above the Southeast Asia averages of 5.1% and 5.2% for 2018 and 2019, respectively.

They also compare to the World Bank, International Monetary Fund, and the Organization for Economic Cooperation and Development’s estimates as of July of 6.7% for both years, as well as the United Nations Economic and Social Commission for Asia and the Pacific’s 6.8% and 6.9% for 2018 and 2019, respectively, as of May.

Mr. Bird said agriculture will continue to weigh on Philippine growth prospects, together with rising inflation and subdued merchandise exports.

“Economic growth remains strong,” he said.

“It softened a little, but that’s because of exports on the demand side but also agriculture on the supply side, and inflation as we know increased well above the target,” he explained.

“We still see those cost-push factors working their way through the economy,” he added, citing the impact of rising food and global oil prices.

“You’ve got a stagnant agriculture sector, and in fact in some areas production declined.”

The regional lender noted that agriculture edged up just 0.6% last semester from 5.6% in 2017’s first half, while growth of exports of both goods and services eased to 9.8% from 19.5% in the same comparative six-month periods.

At the same time, he noted that the government has been “vigilant” and “very proactive in addressing inflation,” citing the 100 basis-point policy interest rate hike so far this year, distribution of cash cards among the poor, administrative orders to streamline distribution of food such as lifting non-tariff trade barriers, cutting red tape in importation, setting up of public outlets and cold storage facilities, among others.

Headline inflation in accelerated to a fresh multiyear-high 6.4% in August from 5.7% a month ago and 2.6% a year ago. The eight-month average in the overall rise in prices clocked in at 4.8%, above the central bank’s 2-4% target range for 2018.

The ADB expects inflation to average five percent this year and moderate to four percent in 2019, compared to its previous projections of four percent and 3.9% for those respective years.

Mr. Bird said the increase in interest rates is “designed to slow down growth on the demand side so you might see some re-softening on growth coming forward.”

Other risks include faster-than-expected interest rate tightening in the United States that would trigger more fund outflows.

Joseph E. Mr. Zveglich, ADB’s assistant chief economist, said in the same briefing that the Philippines may benefit from the US-China trade war since “Philippine producers of [intermediate] electronic goods can retool and attract the suppliers” of finished electronics equipment to the US market “that were previously coming from China.”

Mr. Bird also noted that external debt is currently “relatively low” and fiscal deficit remains “on track,” which “provides a strong setting for continued economic growth but also providing a buffer.”

Asian development outlook 2018 update