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http://news.inq7.net/nation/index.php?index=1&story_id=71906
Warning: Don't rely on OFW money
First posted 01:43am (Mla time) April 07, 2006
By Doris C. Dumlao
Inquirer
THE ASIAN Development Bank yesterday warned that sluggish investments, along with high dependence on overseas Filipino workers' remittances and consumption, were stunting potentials for higher economic growth in the Philippines.
In its flagship annual economic publication, Asian Development Outlook (ADO), the bank projected that the country's gross domestic product would rise by only 5 percent this year against the government's downscaled growth target of 5.5 to 6.2 percent and the 5.1-percent growth posted in 2005.
Growth for 2007 was forecast by the ADB at 5.3 percent.
"There is no immediate prospect of a significant improvement in the growth outlook. Consumption will remain the main driver from the demand side, with support from remittances," the ADB said.
"Introduction of the expanded value-added tax helped lift confidence in the outlook at a time of political uncertainty, though the quality of fiscal consolidation will be watched closely," the ADB said. "Investment continues to lag, while the dependence of growth on consumption and on remittance inflows limits prospects. In the near and medium term, growth of 5 percent is projected."
Inflation was seen to average 6.8 percent this year and 6.5 percent next year, easing from 7.6 percent in 2005.
The ADB lamented that the country's growth performance was falling short of what was required to make "significant inroads into persistent high levels of poverty and unemployment."
It noted that the country's unemployment rate remained "stubbornly high," although to some degree was eased by the exodus of workers overseas.
"Although generating subsequent remittance income, emigration on this scale comes at a high cost in terms of loss of knowledge and skills, and can have high social costs as well," the ADB said.
Citing a "marginal" scope for fiscal or monetary maneuvering to support demand and growth, the ADB said there was little prospect of growth accelerating significantly this year and next year.
Immediate prospects for agriculture, which accounted for 19 percent of GDP, were described as "uncertain" on concerns that the La Niña weather phenomenon, which brings torrential rains, could reduce crop production this year. But a modest rebound in agriculture was assumed for 2007.
"The food and beverage sub-sector of manufactures would also be affected, as prices of raw materials rise in 2006 and subside in 2007," the ADB said.
The ADB projected that export-oriented manufacturers would be bolstered by expected modest gains this year in global trade volumes.
The services sector, with the largest share of GDP at 48 percent, was seen to maintain its high growth of 6 to 6.3 percent, with the transport and telecommunications sub-sector leading growth on the back of market expansion in medium-sized cities and areas of economic expansion outside Metro Manila.
"On the demand side, weakness in investment and exports is expected to be the theme in 2006, but they should pick up in 2007," the ADB said.
Gross fixed capital formation was forecast to rise by 3.5 percent this year and 7 percent in 2007, mostly from increases in private investment and higher public investment in infrastructure.
Agriculture
"The key risks to the immediate outlook include the intensity of La Niña rainfall, which could reduce agricultural production and have spillover effects on the food and beverage sub-sector," the ADB said.
But slippages in the implementation of core reforms, in particular tax administration and power sector reforms, could erode the credibility of the government, the ADB warned.
"Finally, political uncertainty has yet to completely subside, and this has the potential to undermine growth prospects over any time scale," it said.
From 2008 to 2010, the ADB projected that Philippine GDP growth would still likely be locked within the 5 to 6 percent range.
Medium-term forecasts
The bank's baseline forecasts for growth over the medium term were way below the government's official Medium-Term Philippine Development Plan (MTPDP) target rates up to 2010.
To achieve the high targets under the MTPDP, the ADB said the country's capital stock needs to expand by at least 10 percent a year in net terms versus an estimated 3 percent in recent years.
"Lifting the capital stock would require an extended investment push that creates a virtuous cycle of higher rates of productivity, wages and labor absorption. To invigorate investment, momentum must build behind reforms," the ADB said.
"Although the reform agenda is long and potentially complex, demonstrated successes in a few key areas could help shift perceptions and build a consensus behind the need for a determined reform effort over the medium term," it said.
From the supply side, the contributions of the three sectors -- agriculture, industry and services -- are expected to change little and thus services will remain the largest contributor to growth, it added.
The ADB stressed that further gains in fiscal consolidation, especially demonstration of sustained results in tax administration, would help build credibility and provide the basis for strengthening macroeconomic stability.
Its growth forecasts assumed that further progress shall be made in power sector reforms, especially privatization, thus helping to strengthen the investment climate and support a more positive outlook for the medium term.
"However, gains in investor confidence from progress in reforms could be partially offset by sporadic political turbulence," it said.
Regional outlook
Developing Asian economies, the ADB said, will sustain a strong growth in 2006 supported by a broadly favorable outlook for the international economy, the continuing trend toward improved economic management, and apparent resilience to high oil prices.
The ADB projected that the region would achieve an overall economic expansion of 7.2 percent in 2006 and 7 percent in 2007, a marginal easing from 7.4 percent in 2005. But it said the outlook could worsen due to bird flu fears and high oil prices.
Ifzal Ali, ADB chief economist, said: "Asian economies will take strength from the continuing upswing in the global electronics sector and fast growth expected in the People's Republic of China and India."
3 key economies
Growth projections for developing Asia as a region are heavily influenced by three key economies: PRC, India and Republic of Korea. Together, these economies have a combined weight of 66 percent of regional income.
ADO 2006 provides an assessment of recent economic performance for 43 developing member countries, and projections for major macroeconomic indicators for 2006 and 2007.
The ADB said the economies of China and India are forecast to expand this year at 9.5 percent and 7.6 percent, respectively. The September forecast for China's economic growth this year was 8.8 percent, while that for India was 6.8 percent.
Forecast growth for Southeast Asia was raised to 5.5 percent from September's 5.4 percent. The outlook for most Southeast Asian economies, except Laos and Thailand, has been upgraded.
The ADB said growth in developing Asia will largely be fueled by an expansion in major industrial economies that are forecast to grow close to their potential this year, and an increase in global trade.
Increasing demand for electronics also will provide a boost to the region's economy, the bank said.
"The upswing in the global electronics cycle, which began in 2005, should continue through most of 2006, supporting growth in a number of regional economies, in East Asia and Southeast Asia specially," the report said.
Economic shock
While most economies managed to insulate consumers last year from higher oil prices through subsidies, the ADB said that the effects of the higher prices will likely trickle down to consumers this year.
As a result, the ADB has raised its inflation forecast for the region this year to 4 percent from the September estimate of 3.3 percent. Softer inflation of 3.7 percent is forecast for 2007.
The bank said efforts by China and Malaysia last year toward greater currency flexibility had resulted in only the small appreciation of the US dollar, and the continued investment inflows and current account surplus might continue to boost regional currencies this year.
The ADB also said estimates suggest that a bird flu pandemic would result in severe economic shock, which would cost the Asia and Pacific region between US$100 billion (euro81.5 billion) and US$300 billion (euro244 billion).
"At its worst, this would essentially halve economic growth for one year and throw the world into an economic recession, the first global recession since 1982," it said.
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