The surge in growth is being driven by vigorous private consumption, higher government expenditure and a jump in net exports. Growth in personal consumption, which makes up more than three-quarters of the Gross Domestic Product (GDP), has been fueled by the brisk growth of remittances from overseas workers.
In the first half of 2007, government expenditure and public sector construction investment were boosted by accelerated spending ahead of elections and reconstruction activities in typhoon-damaged areas. The finance, transport, and communications services sectors were also strong in the first half of the year.
The unemployment rate fell to 7.4% in April 2007 from 8.2% a year earlier, backed by continuing expansion in the business process outsourcing industry. Nevertheless, “job creation is 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% a year,” the ADO Update says.
Despite the pick-up in demand, inflation slowed to an average of 2.6% during the January-August period, as the impact of a higher value-added tax in 2006 subsided, and the peso’s appreciation helped offset higher import prices.
The ADO Update revised inflation projections downward to 2.9% in 2007 and 3.5% in 2008, as against earlier forecasts of 4.8% and 5.0% respectively.
In 2008, the services sector will continue to drive GDP and is expected to grow at 7.4%. Overseas remittances will support thriving retail trade, transport, residential real estate, and communications services, the ADO Update says. A slow pick-up in global demand for electronics products will add to export growth, keeping the current account surplus at 5.2% of GDP in 2008.
The current account surplus is expected at 5.4% of GDP this year, up from an earlier prediction of 3.2%, due to narrowing trade deficit.
There are also encouraging signs that foreign direct investment inflows into the economy are beginning to pick up, ADO Update says. The government’s success in taming inflation and reining in fiscal deficit have improved the business environment, but companies feel that more needs to be done to strengthen infrastructure and reduce costs of complying with regulations.
Another key area is the power sector. “Progress is needed to avoid power shortages by 2010, a major concern of the private sector,” the report says. It adds that the successful award of bidding on the first 600MW coal-fired thermal power plant in July 2007 was an encouraging sign.
“The main domestic risk to the economic outlook is related to the progress on reforms,” says Ifzal Ali, Chief Economist of the Manila-based multilateral development bank. “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.”
If the Government’s efforts to raise revenues stall, the costs of borrowing to fill the gap could rise. A lower revenue intake could also jeopardize the public investment program, which is needed to support future growth.
