Darwin G. Amojelar
Manila Standard

The Asian Development Bank predicts the Philippine economy to grow by 6.6 percent this year, fueled by low consumer prices and its unexpectedly strong performance in the first six months.

In its Asian Development Outlook 2007 Update released Monday, the ADB said 6.6-percent surge in growth is within the government’s target of 6.1 percent to 6.7 percent.

“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 GDP, has been fueled by the brisk growth of remittances from overseas Filipino workers [OFWs],” the ADB said.

The bank’s outlook was not as rosy in March, when it said the economy would grow by only 5.4 percent this year on weak investment and rising number of jobless Filipinos.

In the first half of the year, government expenditure and public sector construction investment were boosted by accelerated spending ahead of elections and reconstruction work in typhoon-damaged areas. The finance, transport, and communications services sectors were also strong in the first half.

The ADB also raised its projections for other Southeast Asian countries like Indonesia, to 6.2 percent; Malaysia, 5.6 percent and Singapore, 7.5 percent. Its forecast for Vietnam remained constant at 8.3 percent, and for Thailand, 4 percent.

By next year, the ADB said the Philippine GDP would grow by 6 percent, revising its earlier forecast of 5.6 percent.

In 2008, the services sector will continue to drive GDP and is expected to grow at 7.4 percent, the bank said. Overseas remittances will support thriving retail trade, transport, residential real estate, and communications services.

A slow pick-up in global demand for electronics products will add to export growth, keeping the current account surplus at 5.2 percent of GDP in 2008, the report said.

The ADB said there are also encouraging signs that foreign direct investment inflows into the economy are beginning to pick up. It added that 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.

ADB projected inflation to drop to 2.9 percent in 2007 and 3.5 percent in 2008, as against earlier forecasts of 4.8 percent and 5 percent, respectively

The ADB added that merchandise export growth would be boosted by some strengthening of global demand for electronic products next year.

“If the rest of Asia grows as projected, this will benefit the Philippines: its share of total exports going to East Asia [excluding Japan] and Asean has increased from 25.5 percent in 1997 to 41.9 percent in 2006. However, some of these exports are used in the other Asian countries to make products ultimately shipped to the US, so that an unexpected weakening in that market would also have an impact on Philippine exports to the rest of Asia,” it said.

The ADB said the real exchange rate has the least impact on Philippine exports, while the impact is greatest in Indonesia.

“This is consistent with the fact that exports and imports in the Philippines have been dominated by parts and components over the decade. The Philippines’ exports are heavily concentrated in electrical machinery with high reliance on imported components,” the ADB said.

Another key area is the power sector. The bank report noted that the progress is needed to avoid power shortages by 2010, a major concern of the private sector. It added that the successful award of bidding on the first 600MW coal-fired thermal power plant in July was an encouraging sign.

Ifzal Ali, chief economist of the ADB, said the main domestic risk to the economic outlook is related to the pace of reforms being implemented.

“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.

“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,” Ali said.