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World Bank downgrades Philippine growth outlook to 6.5%

MANILA, Philippines — The World Bank has downgraded its growth forecast for the Philippines to 6.5 percent this year amid rising global uncertainties and domestic inflationary pressures.

The multilateral lender last April projected a 6.7 percent economic expansion for the Philippines in 2018. The growth outlook of 6.7 percent in 2019 and 6.6 percent in 2020, however, were maintained.

Also factored into the lowered growth forecast is the slowdown in the first half of the year due to the weak exports of electronics and poor performance of the agriculture sector caused by bad weather.

In its Philippine Economic Update released yesterday, the international finance institution said it expects economic output to pick up in the second half of the year and in early 2019 due to rising public investments on infrastructure and election-related spending ahead of the mid-term elections in May 2019.

“For the second half of the year, the baseline forecast is recovery driven by faster infrastructure spending by the government and election spending that can boost domestic demand,” said World Bank senior economist for the Philippines Rong Qian.

Among the “considerable risks” to growth is the uncertainty in the global economy created by the escalating trade war between the US and China and rising interest rates in the US. These external factors could raise the cost of overseas financing and further weaken the peso.

This also puts the country – along with other emerging economies – at risk of greater capital outflows as investors de-risk their investments, the World Bank economist said.

Rong said there is a need to maintain strong macroeconomic fundamentals while accelerating the implementation of structural reforms to improve productivity. This entails the increasing in physical infrastructure and promoting more efficient use of capital, labor and technology.

Several policy areas the country needs to prioritize in the long-term include improving market competition through regulatory reforms, improving trade and investment climate policies and regulations, and reducing labor market rigidities and costs.

Reforms that boost domestic growth and reduce vulnerabilities of the country’s farming and fisheries sector would also be essential to sustaining high and broad-based growth.

Birgit Hansl, World Bank lead economist for the Philippines, said while capital flight is a real risk for the Philippines, the country is resilient to such because of its strong fundamentals.

“The Philippines is fairly resilient against capital outflows compared to many of its neighbors in the East Asia region,” she said.

“It has large foreign reserves, flexible exchange rate, low public debt and robust remittance inflows. At this juncture, preserving the country’s resilience rests in large part on preventing the current account deficit from widening too much and too fast,” she added.

On the domestic front, high inflation poses a risk to growth as it can dampen private consumption and investments, Hansl said.

She said domestic inflation is expected to remain elevated until next year before slowing down. She also acknowledged the policy actions by the Central Bank to rein in inflation.

“Over the next year, we see the peaking of inflation and a slow retreat,” she said.

The effect on private consumption is expected in sectors where inflation growth is now most pronounced such as food, electricity, utilities and fuel prices for transportation.

“There are supply constraints that need to be addressed. And its not very easy to address them in the short term,” said Hansl.

Rong noted that despite the steady rise in the prices of consumer goods, the Philippines has so far showed resilience to high inflation as indicated by the still robust growth in consumption.

“Inflation is a downside risk, but in the first half, inflation was also high but consumption also remained robust so it shows that the Philippines is resilient to inflation,” she said.

She noted, however, that sustained high inflation would make it more difficult for the government to significantly reduce poverty as the rapid rise in the prices of goods and services erode the purchasing power of the poor.

“High inflation can affect the welfare of the poor as they spend over two-thirds of their expenditure on food and transport. This can potentially slow progress on poverty reduction,” she said.

Source: https://www.philstar.com/business/2018/10/05/1857331/world-bank-downgrades-philippine-growth-outlook-65#hojmIopkKZR7GA5B.99