PHILIPPINES: Structural Reforms Needed to Boost Growth at Above 5 Percent-World Bank Report

December 20, 2011

MANILA, DECEMBER 20, 2011—Reforms to address structural bottlenecks in the economy—including measures to raise revenue for higher spending on infrastructure, health, education and social protection as well as simplifying business regulations to encourage entrepreneurship and job creation—will enable the country to achieve sustained growth at rates above 5 percent in the years to come, according to the Philippines Quarterly Update released today by the World Bank.

“A stronger structural underpinning would allow the country to deal with shocks more effectively, achieve more inclusive growth, and reduce poverty at a faster rate,” said Mr. Karl Kendrick Chua, World Bank Country Economist, who led the preparation of the PQU.

Titled “Sustaining Growth in Uncertain Times,” the report projects the Philippines’ economic growth to moderate at 3.7 percent in 2011, weighed down by weak global demand as well as low public spending in the first three quarters of the year.

“Our projection hinges on the successful implementation of the government’s disbursement acceleration program and an acceleration in private consumption and investment, which have begun to grow faster in the last quarter,” Mr. Chua said.

Growth in 2012, the PQU says, is projected to improve to 4.2 percent in line with regional forecasts. Higher 2012 growth hinges on improvement in exports, acceleration of public-private partnership (PPP) projects and private sector investment, and a full recovery of public spending.

“The Government is instituting important measures to improve transparency and accountability in public spending. Once these institutional reforms are in place, spending is expected to fully recover at cost-effective levels with more resolute impact on the country’s growth and development,” said Mr. Chua.

The PQU highlights the continuing risks posed by the global economy to the Philippines’ growth prospects.

The external environment, it says, has become much weaker in recent months. Japan fell into recession in 2011 due to the effects of the earthquake and tsunami. Growth in the United States was sluggish in the first half. Output in the Eurozone has weakened sharply in the second half and there are fears that the region may go into recession in early 2012.

Growth in East Asia is projected to slow down from 8.1 percent in 2011 to 7.7 percent next year. While a number of countries are expected to enact fiscal stimuli to buoy growth, these are likely to be limited given narrower fiscal space.

Nevertheless, the PQU notes that the Philippines is relatively well-positioned to weather shocks emanating from the current global turmoil because of its strong macroeconomic fundamentals, regulatory reforms and prudential measures instituted following past crises and slowdowns.

Overseas Filipino workers’ large remittance inflows have insulated the country from external imbalances. The financial sector’s conservative stance throughout the preceding decade has helped to ensure healthy balance sheets. The corporate sector also exhibited no systemic vulnerabilities.

World Bank Acting Country Director Chiyo Kanda said the Government can support growth by appropriate fiscal expansion given ample fiscal space. “Improving revenue performance is vital to supporting an effective stimulus program while keeping the deficit within sustainable bounds,” she said.

The PQU notes that the Government has initiated several reform measures for 2012 including raising excise taxes of alcohol and tobacco, pushing for the enactment of the fiscal responsibility and fiscal incentives rationalization bills to plug future leakages in tax revenues, and improving equity and efficiency of the tax system. Ensuring the enactment of these measures would be critical to raise spending in infrastructure and human capital to support medium-term growth prospects, says the report.

“These reform measures are steps in the right direction. An acceleration of these reforms, in particular raising excise taxes of alcohol and tobacco as proposed by the Administration, would help secure the much needed revenues to increase public spending especially for infrastructure development, health and education that should benefit the poor,” said Ms. Kanda.

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