Philippines: Strong Fundamentals Cushion Impact of Global Economic Turmoil—WB Report

Manila, October 6, 2011—The slowdown in the United States and Europe is affecting Philippine exports but the country’s strong macroeconomic fundamentals are cushioning the impact of the global economic turmoil on the local economy, says the Philippines Quarterly Update (PQU) released today by the World Bank.

The PQU says that the Philippines’ external position and macroeconomic fundamentals remain strong. The current account surplus increased by 20 percent in the second quarter (year-on-year), owing to higher remittances and net services receipts.

“Net foreign direct investments increased in the first half and foreign reserves have surged to record highs thanks to strong capital inflows as well as sustained growth of remittances and income from investments abroad,” says the PQU.

Attracted by relatively higher growth prospects and yield differentials, net foreign portfolio inflows soared through August, at US$3.1billion, more than triple last year’s amount, the report says.

“To better insulate the Philippine economy from external shocks, it is important to maintain strong macroeconomic fundamentals and improve its competitiveness through diversifying exports, strengthening domestic competition, and improving productivity of the services sector,” said World Bank Economist Soonwha Yi who led the team that prepared the PQU.

Produced by the World Bank Office in Manila, the PQU provides regular updates on key economic developments and policies in the Philippines as well as presents findings from recent World Bank work in the country.

The report says in view of the slower growth and weaker economic outlook in advanced economies, the Philippines is forecast to grow at 4.5 percent in 2011 and 5.0 percent in 2012, a revision from the previous forecasts of 5.0 percent and 5.4 percent, respectively, for both years.

“Private consumption is expected to grow steadily, buoyed by lower unemployment, higher government spending and sustained remittances,” said Ms. Yi. “With ample fiscal space, the government is expected to boost spending in the second half and catch up on delayed implementation of infrastructure projects.”

According to the PQU, government’s zero-based budgeting process has generated sufficient fiscal space to scale up spending on priority social and economic agenda.

The report says that domestic investment is projected to expand to 21.8 percent of GDP for 2011 (from 20.5 percent in 2010), and to improve further to 23.1 percent in 2012, as the government accelerates the pace of its capital outlays and as business sentiment turns more positive.

“On the supply side, growth for the full year 2011 is expected to come from the services and industry sectors, favored by a more upbeat business sentiment and with the full roll-out of infrastructure-related projects,” said Ms. Yi.

World Bank Lead Economist Ulrich Lachler said that the Philippines is currently enjoying relative political stability and a strong fiscal position. Capital inflows are expected to continue, but foreign direct investment (FDI) is projected to moderate as foreign investors have become more cautious in light of recent financial turmoil, he said.

“To ensure inclusive growth or growth that benefits the poor, higher revenues through improved tax administration and reforms will enable the government to meet its priority spending targets, especially in public infrastructure and investment in human capital," Mr. Lachler said.

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