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Improved Finances and Reforms to Cushion Impact of European Debt Problems on RP – World Bank

MANILA, JULY 14, 2010–The European sovereign debt problems loom as a fresh threat to the global economic recovery but improving the Philippines’ public finances will strengthen the country’s economic defenses against its potential impact as well as improve government spending for pro-poor programs.


This is one of the main messages of the Philippines Quarterly Update (PQU) released by the World Bank.


Early this year, concerns about rising indebtedness in European countries has generated fears that the global economy might slide back to recession and cause further difficulties in developing countries like the Philippines.


“A credible plan towards fiscal consolidation over the medium-term—along with measures to manage fiscal risks—would significantly reduce the Philippines’ exposure to the worsening European debt problems,” says the PQU. “Such credibility could be achieved, for example, by designing a comprehensive and multi-year reform package.”


The Report says stronger public finances inspires confidence of the financial markets, creates policy flexibility to tackle global downside risks, and boosts economic growth.


“The Aquino Administration’s focus on increasing the efficiency of revenue collection and expenditures is welcome in that regard and is expected to generate important fiscal space,” says World Bank Senior Economist Mr. Eric Le Borgne. 


He added: “The government would need more funds for education, health, and other social programs so that marginalized sectors could equitably share in the benefits of growth in a sustainable way.”


The PQU forecasts the Philippine economy to grow by 4.4 percent in 2010 and 4.0 percent in 2011 on the back of a global recovery in trade. The country’s growth potential could be much higher given the new Administration’s strong reform and anti-corruption agenda that could shore up business confidence.


“While large fiscal risks in some European countries have dampened growth prospects in that region, the global growth outlook remains favorable especially for emerging markets, including the Philippines,” says Mr. Le Borgne. “Domestic reforms would be a catalyst for higher growth.”


The PQU forecasts dollar remittances from overseas Filipino workers (OFWs) to increase by 8 percent this year but to be almost flat in real peso terms because of inflation and an appreciated peso compared to last year.


The Report says that deployment of OFWs actually accelerated during the recent global financial crisis partly because top OFW destinations were not as affected as the rest of the world.


Worldwide, growth is firming up to reach 3.1 to 3.3 percent this year. Developing countries are projected to grow significantly faster, to a little over 6 percent. Growth in the United States and Japan is firming up and has spread to the private-sector, becoming more broadly based and self-sustaining.

In contrast, however, growth in European countries, weighed down by the debt-related issues, remains weak.


The PQU says the contagion from the European sovereign debt problems is so far limited to a few countries like Argentina and Venezuela. It says the Philippines has minimal direct trade and financial linkages to troubled economies in Europe’s periphery. 


Together, the five at-risk economies—Greece, Spain, Italy, Ireland and Portugal—account for modest shares of annual trade and investment flows of the Philippines.  Relations with Greece—the epicenter of the crisis—deal mostly with Filipino workers many of whom are in the maritime industry where remittances have actually increased during the global financial crisis. Financial links with the five countries are even less notable. 


The PQU adds that any exposure Filipino investors, including banks, may have to their sovereign debts are protected by a EUR 750 billion aid package backed by the European Commission and the International Monetary Fund.

“The Philippines has a current account surplus and, more generally, a healthy external position and its banks are conservatives in their lending, funding, and investment strategies,” says the PQU. “[Banks] have low loan-to-deposit ratios so that they have limited reliance on external wholesale funding markets."

The Philippines Quarterly Update, produced by the economics team of the World Bank in Manila, provides quarterly updates on key economic developments and policies in the Philippines.

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