The Philippine economy’s growth rate during the first half of 2010 was faster than any analyst’s imagination. It rebounded by 7.9%, up from just 0.9% in the first half of 2009. But ADB is less optimistic about the Philippine economy during the second half of the year and next year.
ADB sees a deceleration in the second half of 2010 and in 2011.There are several reasons, internal and external. First, the low-base effects will fade; second, inventory rebuilding will level off; third, the global economy is expected to weaken as the economies of the US and Japan start to slow; and fourth, as the Philippine government spending for public infrastructure is reduced by about 10%.
The expectation is that the cut in public investment will be offset by increased private sector participation in a number of transport and utilities projects next year. But its net economic impact remains to be uncertain. Besides, outputs don’t get counted in the national income statistics until privately sponsored public projects get off the ground. Counting chicks before the eggs get hatched is foolhardy.
The recent upgrade for 2010 puts the Philippines’ GDP at 6.2%, marginally higher than Indonesia’s 6.1%. But it will lag behind all other countries in the fast-growing Southeast Asian region. Singapore is expected to grow by 14.0%, Thailand by 7.0%, Malaysia by 6.8%, and Vietnam by 6.5%.
Next year, the Philippine economy is expected to slow to 4.6%, consistent with forecasts by other international institutions like the World Bank and the IMF. This slower growth is only marginally higher than Thailand’s 4.5%, but lower than other Southeast Asian nations: 7% for Vietnam, 6.3% for Indonesia, and 5.0% for both Malaysia and Singapore.
Moving South
The new administration can’t claim credit for ADB’s upgrade. The higher-than-expected GDP growth happened during the first half of the year, still during Arroyo’s watch.
The present administration’s economic planners should worry that the economy is moving south rather than north -- that the economy is expected to grow much slower than originally targeted (7.0-8.0% based on the Macroeconomic Parameters, 2007-2011, Budget of Expenditures and Sources of Financing).
The economic planners should also worry that the Philippines has a lot of catching up to do. Not only are some of our Southeast Asian neighbors richer than us, they are also expected to grow much faster. Indonesia and Vietnam, our two likely competitors are not only growing faster, they are also attracting more foreign direct investments (FDIs).
From 2005 to 2009, a mix of pre-crisis and crisis years, the Philippines attracted $11.2 billion FDIs. Indonesia attracted $33.5 billion FDIs while Vietnam attracted $21.8 billion.
Major Challenges
The tasks ahead are formidable. Not only should the economy grow faster next year; the Philippine economy has to sustain strong, inclusive growth in the next five years.
The first major challenge for the Aquino III administration is how to put back the Philippines in the foreign investors’ radar screen. Aquino’s successful US trip helped, but much more need to be done.
Poor governance, political instability, spotty rule of law, and poor fiscal health have turned off potential investors to the Philippines. Foreign investors are not likely to invest in a country whose investment climate is murky and is faced with fiscal uncertainty. Foreign investors dislike the prospect of paying higher taxes in the future because of government’s huge debt and fiscal recklessness.
The other major challenge for the Aquino administration is how to improve revenue collection. Its ambitious but worthy social and infrastructure spending has to be financed. The financing requirements are high because of past neglect and because of population inertia.
The current policy of relying on improved tax administration has to be revisited quickly. It is simply not enough and could risk the delivery of essential public services.
Delaying tax reforms may be costly. Reforming the tax system now rather than later makes a lot of sense in the face of Aquino’s still-high, though waning, political support. Waiting for another year could erode his political capital. At the same time, legislators who are facing reelection or are planning to move to higher positions in the 2013 elections are not likely to risk supporting politically unpopular, though economically sound, tax reform.
In policy setting, as in politics, timing is crucial.
Source: http://www.bworldonline.com/main/content.php?id=18612
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