Posted on 18 September 2007

 

THE Asian Development Bank has upgraded its economic outlook and lowered its inflation forecasts for the Philippines for 2007 and 2008, citing the economy's solid performance in the first half of the year.

In its updated Asian Development Outlook report released yesterday, the Manila-based multilateral lending institution says it now expects the country's gross domestic product to grow by 6.6 percent in 2007 and by 6 percent in 2008, up from earlier forecasts of 5.4 percent and 5.7 percent, respectively.

But analysts say the US dollar's continuing decline presents a threat to countries that continue to hold the US unit as their primary reserve currency.

The Philippines' central bank, for one, keeps its reserves mainly in US dollars, and Filipinos abroad hold on to US dollars before converting them into pesos to send home.

The analysts quoted former Federal Reserve Chairman Allan Greenspan as saying the euro could replace the US dollar as the world's primary reserve currency—and mainly because the dollar continued to decline because of the size of its current account deficit.

"You inherit the dollar's weakness if you hold on to it. It's better to shift to the euro," one of the analysts said.

The Philippines aside, the ADB says Asia's developing economies will expand faster than it earlier estimated, and are well placed to weather any US slowdown and turmoil in global credit markets.

The bank says growth in Asia excluding Japan and Australia is expected to reach 8.3 percent this year, beating a March estimate of 7.6 percent. It says the region will expand 8.2 percent in 2008, faster than an earlier forecast of 7.7 percent.

"Developing Asia's defenses against external shocks are solid and it can weather a slowdown in the US," ADB chief economist Ifzal Ali said. "It has stout financial defenses and some scope for policy adjustment," he said.

The bank revised its outlook on the Philippines after its economy expanded by 7.3 percent in the year to June 2007, faster than the 5.6 percent that it registered in the same period last year.

Its 2007 growth forecast for the country was within the government's projected growth range of 6.1 to 6.7 percent.

"The outlook for the full year has improved, with the stronger-than-expected first-half performance and lower than projected inflation. Private consumption spending will continue to be boosted by remittances," the bank said.

But the bank says government spending is unlikely to be as strong as in the first half with elections out of the way.

"The contribution of net exports is projected to decline too because imports were unusually weak in the first half," the bank said.

"Moreover, a prolonged dry spell, mainly in the largest island of Luzon, could hurt agricultural output. Consequently, GDP growth in the second half is not projected to match the first-half result."

Still, the bank expects robust growth to be sustained in 2008, though not at this year's pace.

"Services will continue to be the main driver, supported by growth in remittances and therefore in consumption," the bank said.

"Retail trade and transport, residential real estate, and communications services are expected to expand strongly. Services as a whole is projected to grow by 7.4 percent next year."

The bank also revised its 2007 inflation forecast downward to 2.9 percent from 4.8 percent, and average inflation in 2008 to 3.5 percent from 5 percent.

It made its revisions after actual inflation slowed to an average of 2.6 percent in the first eight months of 2007 as the impact of a higher value-added tax in 2006 subsided, and after the peso's appreciation helped offset higher import prices.

The government's success in taming inflation and reining in its fiscal deficit have improved the business environment, but companies feel that more needs to be done to strengthen infrastructure and reduce the cost of complying with regulations, the bank says.

And despite its mainly optimistic forecasts, the bank says job creation remains a major challenge for the Philippines, given that 43 million people live on less than $2 a day and the labor force is increasing by 2 percent a year.

It also warns about impending power shortages in the coming years.

"Progress is needed to avoid power shortages by 2010, a major concern of the private sector," it said, while acknowledging that the successful bidding on the first 600-megawatt coal-fired thermal power plant in July 2007 was an encouraging sign.

Ali says the main domestic risk to the economic outlook is related to the progress on reforms.

"Despite improvement in the fiscal position last year, a shortfall in revenue collection in the first half of the year has raised concerns about the fiscal consolidation program," he said.

He says a lower revenue intake could jeopardize the public investment program, which is needed to support growth.

Manila Standard Today, September 18, 2007

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