ROBUST consumption spending is expected to boost the country’s economic growth and meet its GDP target this year, according to the World Bank.
In its East Asia Pacific (EAP) Update, the World Bank said the Philippine economy will see better-than-earlier-expected growth of 6.5 percent this year before slowing to 5.8 percent next year.
In April, the World Bank only estimated that the country’s GDP growth this year would average 5.7 percent, similar to the actual full-year GDP growth in 2021. The current administration targets a growth of 6.5 to 7.5 percent this year.
“I think the main reason again, as I said before, is the strong bounce back of private consumption in the Philippines, as in most countries in the region,” World Bank East Asia and Pacific Chief Economist Aaditya Mattoo said in a virtual briefing on Tuesday.
“It is also evident to us if you see one of the charts in the report that you have that the Philippines is one of countries which saw reasonably good export performance, [and] even more than that, the revival of both public and private investment,” he added.
Mattoo also said the recently concluded Presidential elections as well as the revival of tourism in the country is contributing to the robust consumption spending by both households and the government.
These, Mattoo said, are offsetting any negative impact of the tightening of monetary policy in the country. He said the government’s fiscal policy also seems “a little bit more accommodative” which prompted the upward revision of the country’s growth prospects.
“Output in Cambodia, the Philippines and Thailand [are] expected to surpass prepandemic levels of output in 2022, and output in many Pacific islands is not likely to return to prepandemic levels even by 2023,” the EAP read.
However, while growth is expected to be on target, the World Bank said the country was not immune to the three regional risks—deceleration, debt, and distortions.
G7 slowdown
Mattoo said the slowing global growth poses a threat to the economic performance of countries in East Asia and the Pacific region. The impact of a slowdown in G7 economies, excluding Japan, in the Philippines is greater than the impact of a slowing China economy.
Based on the World Bank estimates shared by Mattoo in his presentation, the impact of a G7 slowdown is a deeper decline of over 0.4 percentage points while a slowdown in China would be less than a contraction of 0.4 percentage points.
In terms of debt, Mattoo said, the burden of debt has risen on the back of the pandemic. But the debt is expected to increase further as interest rates increase and currencies depreciate.
The EAP report said large amounts of sovereign bonds are coming due this year and next year, the bulk of which, however, are denominated in local currency. In the Philippines, a total of $41 billion worth of debts are maturing by end-2023.
“A worsening sovereign debt outlook due to higher global rates and exchange rate depreciations could lead to higher sovereign funding costs and threaten sovereign debt sustainability,” the report stated.
“The unprecedented policy support measures deployed during the pandemic have led to record levels of public debt.”
In terms of price distortions, the Philippines will be less affected as most of its efforts were targeted at extending cash transfers rather than price controls and trade barriers.
Based on World Bank estimates, fiscal interventions to combat rising commodity prices were seen in agriculture or fertilizer subsidies amounting to 0.12 percent; fuel subsidy, 0.02 percent; and other transfers, 0.21 percent of GDP.
Other countries in Southeast Asia such as Malaysia and Indonesia imposed price controls and trade restrictions on top of the subsidies they extended.
In Malaysia, the government imposed a price control for chicken and implemented a poultry export ban. Indonesia imposed a price control on cooking oil and banned the export of palm oil.
“In the Philippines’s case, there is also an interesting contrast. 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, less so,” Mattoo said in a briefing.
Regional growth
The World Bank said growth in developing East Asia and the Pacific outside of China is forecast to accelerate to 5.3 percent in 2022 from 2.6 percent in 2021, according to the World Bank’s East Asia and Pacific October 2022 Economic Update.
China, which previously led recovery in the region, is projected to grow by 2.8 percent in 2022, a sharp deceleration from 8.1 percent in 2021.
For the region as a whole, growth is projected to slow to 3.2 percent this year from 7.2 percent in 2021, before accelerating to 4.6 percent next year, the report says.
“Economic recovery is underway in most countries of East Asia and the Pacific,” said World Bank East Asia and Pacific Vice President Manuela V. Ferro. “As they prepare for slowing global growth, countries should address domestic policy distortions that are an impediment to longer term development.”
Growth in much of East Asia and the Pacific has been driven by recovery in domestic demand, enabled by a relaxation of Covid-related restrictions, and growth in exports.
China, which constitutes around 86 percent of the region’s output, uses targeted public health measures to contain outbreaks of the virus, inhibiting economic activity.
The global economic slowdown is beginning to dampen demand for the region’s exports of commodities and manufactured goods. Rising inflation abroad has provoked interest rate increases, which in turn have caused capital outflows and currency depreciations in some East Asia and Pacific countries.
These developments have increased the burden of servicing debt and shrunk fiscal space, hurting countries that entered the pandemic with a high debt burden.
As countries of the region seek to shield households and firms from higher food and energy prices, current policy measures provide much-needed relief, but add to existing policy distortions.
Controls on food prices and energy subsidies benefit the wealthy and draw government spending away from infrastructure, health and education.
Lingering regulatory forbearance, meant to ease lending through the pandemic, can trap resources in failing firms and divert capital from the most dynamic sectors or businesses.
Image credits: Nonoy Lacza