ECONOMY STILL DEPENDENT ON PEOPLE’S SPENDING

ADB’s Asian Development Outlook 2018 report released April 11, 2018, projects 6.8 percent Gross Domestic Product (GDP) growth for 2018, faster than the 6.7 percent rate in 2017. The economy will grow further, by 6.9 percent, in 2019.

Strengthening domestic demand will underpin growth in 2018 and 2019. Investment will be supported by large public infrastructure projects such as national and provincial roads, railways, airports, and the Philippines’ first mass transit subway.

Export growth will likely moderate from last year’s rebound. Low unemployment and steady remittances will continue to support private consumption, says the Manila-based ADB..

“Along with domestic demand, the government’s infrastructure investments will fuel the country’s growth in the next few years, supported by a sound economic policy setting. We expect this growth to further lift wage employment numbers, add to household incomes, and benefit more poor families across the archipelago,” said Kelly Bird, ADB’s new country director for the Philippines.

Bird gushed the Philippines was now on its “golden age” as economic growth has been achieved for more than 50 years.

He said, economic expansion would be sustained in 2018 and 2019 as “reforms are in place to support the government’s infrastructure plan,” referring to the massive “Build, Build, Build” program.  Here is ADB’s outlook report on PH:

An accommodative fiscal policy is likely to continue this year and next. The 2018 budget raises expenditure by 12.4 percent over last year, with two-thirds allocated to regions outside of Metro Manila.

Allocations 
for the provinces are 25 percent higher than in 2017 and are earmarked for rural development and job creation toward improving rural incomes. The budget for infrastructure is a quarter higher, equal to 6.1 percent of GDP, up from 5.4 percent in 2017.

The government recently approved free tuition in all state universities and colleges under the Universal Access to Quality Tertiary Education Act, 2017 and free irrigation for smallholder farmers under the Free Irrigation Service Act, 2018.

The government is mobilizing more revenue to allow for higher investment in infrastructure and social services while keeping the fiscal deficit within 3 percent of GDP in the medium term. It thus targets the ratio of revenue to GDP in the 2018 budget to rise to 16.3 percent from 15.7 percent last year.

Early progress toward achieving the revenue target was made in December 2017 with the approval of the Tax Reform for Acceleration and Inclusion law, the first phase of government’s comprehensive tax reform program.

The law is projected to yield P90 billion in additional revenue in 2018 and P144 billion in 2019. Further augmentation of tax revenue is anticipated as the government pursues succeeding phases of comprehensive tax reform.

Strong household consumption is seen continuing this year and next. Remittances from overseas Filipinos are expected to continue
to support household consumption. From the fiscal side, a cut in the personal income tax should boost disposable income and consumption among taxpayers, but an increase in excise taxes on petroleum products and a few other commodities could be a counterweight restraining household consumption.

 Several signs point to strengthening private investment. Imports
of capital goods rose by 16.9 percent year on year in January 2018, while
bank credit to businesses increased by 18.1 percent in the same month.

The government is improving the investment climate by streamlining procedures for doing business in national and local agencies alike, including for business registration and applications for permits.

In December 2017, Fitch Ratings upgraded the Philippine rating for long-term foreign currency credit to BBB from BBB–, which should reinforce market confidence.

 A business outlook survey conducted by the central bank in first quarter of 2018 found sentiment upbeat in response to strong domestic demand and the expected increase in public infrastructure spending.

By sector, services will continue to provide much of GDP growth as broad expansion continues. The purchasing managers’ index in January 2018 reached its highest since May 2016 with improving readings for services, trade, and manufacturing.

Manufacturing
will continue to expand on robust domestic demand and exports. The manufacturing production index rose by 21.9 percent year on year in January 2018 on strong growth in food and beverages, construction materials, and some export-oriented products.

Construction will benefit largely from public infrastructure projects, but it is notable that building permits for privately constructed commercial and office buildings expanded by 23.2 percent year on year in the fourth quarter of 2017.

As growth strengthens, inflation is projected to pick up to 4 percent in 2018, using a consumer price index series based on 2006. Inflation in the first two months of this year accelerated to 4.2 percent using that series but slowed to 3.7 percent using a new series rebased on 2012.

Inflation largely reflected a rise in global oil and food prices and peso depreciation. Higher excises on fuel, sugar-sweetened beverages,
and cigarettes since January 2018 could contribute to inflation, but mitigation measures are under way.

The government is moving away from restrictions on the volume of rice imports toward tariffs on rice imports to help augment domestic supply and contain domestic rice prices. Inflation is forecast at 3.9 percent in 2019, with upward adjustment to monetary policy rates anticipated in line with tightening monetary policy globally.

Import growth is expected to outpace export growth in light of robust domestic demand.

The expected widening of the merchandise trade deficit this year and next should mean a wider but still modest current account deficit, contained by a further rise in remittances and service exports, notably in business process outsourcing and tourism.

Improving business sentiment points to a continued uptrend in foreign direct investment.

External risks to the outlook would be heightened volatility in international financial markets or a revival of protectionist trade policies around the world.

However, a strong external payments position appears to make the Philippines resilient under any foreseeable external shock.

External debt trended down to the equivalent of 23.3 percent of GDP in
2017. National government debt has moderated to 42.1 percent of GDP and is denominated mostly in local currency.

The Philippine government has embarked on a massive infrastructure program worth $160 billion–$180 billion from 2017 to 2022, called “Build Build Build.”

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