Outlook for Philippine Economy Remains Strong, Says ADB

Robust growth is set to continue in the Philippines in 2016 and 2017 on the back of strong investment, private consumption, and the government plan to accelerate investment in infrastructure and human capital, says a new Asian Development Bank (ADB) study.

In an update of its flagship annual economic publication, Asian Development Outlook 2016, ADB now forecasts 2016 gross domestic product (GDP) growth of 6.4%, up from its March projection of 6%.

For 2017, growth is seen dipping back slightly to 6.2%, but is still above the previous forecast of 6.1%. The Philippines has emerged as one of the fastest-growing economies in Southeast Asia.

“The outlook for the Philippine economy remains strong amid buoyant investment and domestic consumption,” says Richard Bolt, ADB Country Director for the Philippines.

“If successfully implemented, the new government’s development agenda to step up spending on infrastructure, implement tax reforms, and cut through red tape will sustain high growth rates and increase job creation.”

The surge in investment and consumption saw the economy expand by 6.9% in the first half of 2016. Election-related spending and consumption, along with booming fixed investment from both the private and public sectors, were the key drivers, with the ratio of GDP to fixed asset investment reaching its highest level in over a decade.

Underpinning the strong performance of consumption was a rise in job creation, with the unemployment rate falling to 5.4% in July 2016 from 6.5% the year earlier, and remittances from Filipinos overseas.

Services, the largest sector of the Philippine economy, generated two thirds of the growth, with retail trade, business process outsourcing, and real estate activity leading the way, while merchandise exports remained subdued, amid still soft global demand.

Moving forward, the Update says a continuation of the strong growth will hinge on advancing the reform agenda, which includes measures to address infrastructure bottlenecks, stronger efforts to develop rural and regional areas, and enhancing transparency and accountability in government.

Fiscal policy

Fiscal policy is also expected to be expansionary in 2017, with the budget spending set to increase by 11.6% over the 2016 level, with significant increases earmarked for infrastructure, education, health, and social protection.

Proposed tax changes, including lower corporate and personal income tax rates, are expected to improve the business environment and underpin further growth, with any reduction in tax revenues seen to be offset by a potential broadening of the value-added tax base, an increase in oil excise taxes, and the streamlining of current tax incentives to investors.

Foreign direct investment inflows almost doubled from January to June 2016 from the year earlier period, and the outlook for private investment remains favorable, particularly if the government follows through on commitments to ease the cost of doing business, address infrastructure bottlenecks, and accelerate public-private partnership projects, the study says.

Services, particularly retail trade, buoyant business process outsourcing industry and  growing tourism, will be key growth drivers over the forecast period, with international visitor arrivals up by over 13% year-on-year in the first half of 2016.

Inflation meanwhile is expected to remain subdued at 1.8% for 2016, below the previous ADB forecast, with the impact of the drought on food prices less than anticipated. However, inflation is seen moving up to average 2.8% in 2017, as global oil prices and domestic demand rise.

The updated assessment says key risks to the outlook include weaker than expected demand from major markets for Philippine exports. Strengthening the rural economy is also key, given the higher prevalence of poverty in regions outside the main cities, the report says.

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