The Philippine Economic Update released yesterday showed the World Bank keeping a 6.9% projection for Philippine gross domestic product (GDP) growth for 2017 (penciled in December and January, up from 6.2% given in April and October) against the government’s own 6.5-7.5% target, cutting 2018’s outlook to also 6.9% (from the 7.0% given in December and January, up from the 6.2% projected in October) and raising the forecast for 2019 to 6.8% (from the 6.7% projected in January).

Birgit Hansl, the World Bank’s program leader and lead economist for the Philippines, East Asia and Pacific, said in a press briefing yesterday at the lender’s headquarters in the country in Taguig City that there were “no specific reasons” for the changes in growth projections, which resulted from mere statistical adjustments.

“For us, it’s just the same outlook,” Mr. Hansl told reporters.

The multilateral lender’s 2018 and 2019 forecasts compare to the 7-8% targeted by this administration until it ends its term in mid-2022.

GDP grew by an upwardly revised 6.9% last year, fueled by public and private investments, higher state expenditures, spending related to the May elections and a slight rebound in farm production that added to the lift provided by consistently strong household consumption.

INFLATION
Inflation is expected to remain manageable — staying within central bank targets — even as it picks up.

The annual rise in the prices of goods and services widely used by a typical Filipino household is expected to pick up to 3.3% in 2017 and 3.0% in 2018 — against the central bank’s own 3.4% and 3.0% forecast averages for those years — from 2016’s actual 1.8%, before easing to 2.8% that still falls within the government’s 2-4% annual inflation target range until 2020.

Inflation averaged 3.2% last quarter, still within the central bank’s 2-4% target band but below the official forecast for the entire 2017.

Relatively slow inflation, the World Bank said, “boosted households’ purchasing power, while a steady increase in remittance inflows accelerated the growth of household consumption.”

Mara K. Warwick, World Bank country director for the Philippines, noted in a separate statement that “strong growth in recent years has been accompanied by job creation and a declining number of people living in extreme poverty.”

“That means growth is becoming more inclusive.”

HINGE
“The Philippines’ growth outlook remains positive,” the World Bank said in its report, with the “economy likely to grow close to seven percent in next three years.”

“Supported by sound domestic macroeconomic fundamentals and an accelerating recovery among other emerging markets and developing economies, the Philippines is expected to remain one of East Asia’s top growth performers,” the same report read.

“The government’s commitment to further increasing public infrastructure investment is expected to sustain the country’s growth momentum through 2018 and reinforce business and consumer confidence,” it added.

“The implementation of planned infrastructure projects could generate positive spillover effects for the rest of the economy, spurring additional business activity, accelerating job creation, and ultimately contributing to higher household consumption.”

The current administration plans to increase spending on infrastructure to an equivalent of 7.1% of GDP by 2022 from a programmed 4.3% of GDP in 2015 and from 1.8% in 2010.

This year’s P3.35-trillion national budget programs spending on public infrastructure to increase 13.79% to P860.7 billion, equivalent to 5.4% of GDP, from P756.4 billion, or 5.1% of GDP, in 2016.

The Department of Budget and Management last Monday reported that infrastructure spending hit P493 billion in 2016, up 42.8% from 2015, but fell 7.5% short of a P533.1-billion program. That shortfall, however, was still better than 2015’s 20% gap.

‘FISCAL RISKS RISING’
Increased state spending, however, carries its own risk, the World Bank cautioned.

“Domestically, the key short-term downside risk to growth is the government’s ability to deliver on its significant infrastructure investment commitments, which are projected to be the main driver of economic growth from 2017-2018,” the report read.

At the same time, however, “[i]n the medium-to-long term, the government’s planned expansionary fiscal strategy could lead to fiscal sustainability challenges.”

The report noted that the focus of the current government on spending more to support economic expansion has yielded results. The administration of President Rodrigo R. Duterte, who began his six-year term at noon of June 30 last year, plans to differentiate itself from its predecessor under former president Benigno S. C. Aquino III which had worked to bag successive investment-grade credit ratings starting 2013 by building fiscal space but at the expense of spending.

This time, the World Bank noted, budget execution improved, “with average underspending shrinking” to 3.6% of programmed spending last year from 12.8% in 2015.

As expenditure growth outpaced revenue increase, the fiscal deficit nearly tripled to 2.4% of GDP at P353.4 billion last year from 0.9% or P121.7 billion in 2015, even as it remained within the government’s 2016 fiscal-deficit target of 2.0-2.7% of GDP.

The government has raised the programmed deficit to 3.0% of GDP over the next two years, the World Bank noted.

“Strong macroeconomic fundamentals will provide some space for the government to implement its public-spending and social investment agenda, but fiscal risks are rising,” the report read.

“This aggressive expansion in spending could pose fiscal sustainability challenges,” it added, noting that “[t]he administration’s ambitious infrastructure agenda was introduced without yet addressing existing constraints to public investment management.”

The public-private partnership (PPP) framework pushed by the previous administration could be used to prod infrastructure buildup, the report read, even as it noted that the current administration has been slow to roll out such projects. Current economic managers have found that scheme cumbersome, hence, have been removing from the pipeline projects the government can otherwise do on its own or with official development assistance.

EXTERNAL PRESSURES
Outside the country, the Federal Reserve is widely expected to continue normalization of US interest rates — up to two hikes this year after 25 basis point each in December 2015 and 2016 and just last month after nearly a decade of near-zero levels — in turn fueling projections of similar hikes at home in order to keep rate differentials steady.

“A faster-than-expected increase in global interest rates and commodity prices could rapidly deteriorate the Philippines’ external balances and drive up the inflation rate. A further increase in US yields — driven by a sudden reassessment of US monetary policy expectations — could lead to a renewed tightening of financing conditions, resulting in the peso’s depreciation and portfolio outflows,” the report cautioned, explaining that a “weakening peso could exacerbate the country’s external balances given the significant amount of imported capital goods needed to achieve the infrastructure investment agenda in the medium term.”

“It could also drive up consumer prices as many consumer goods, such as rice, cereals, and dairy products, and raw materials, such as wheat, fertilizers and animal feeds, are partially imported.”

PRESCRIPTIONS
Should any of these medium-term risks materialize, the World Bank said, “efforts would need to be intensified to preserve the country’s investment-grade ratings.”

Besides unclogging infrastructure planning and implementation bottlenecks and timely approval of tax reforms in order to support planned bigger state spending, the multilateral lender said sustaining and enhancing the inclusiveness of overall economic growth will require other structural reforms like removing restrictions on competition and foreign investment as well as other obstacles to doing business “which continue to discourage private investment.” — Elijah Joseph C. Tubayan