A PROLONGED war in the Middle East, coupled with climate-related shocks, is expected to weigh on the country’s economic growth, prompting the Asian Development Bank (ADB) to trim its growth outlook.
“Given the geopolitical tensions, which we [have seen] escalate since the July Asian Development Outlook, this [has] heightened and broadened inflationary pressures, sharply raising costs for households and businesses,” ADB Senior Economics Officer Teresa Mendoza said during the release of the September Asian Development Outlook (ADO) on Wednesday.
“Along with the delays in public investment, which we saw up to the second quarter of this year, this [has] actually dampened growth more widely than we expected,” she added.
The Manila-based lender trimmed its gross domestic product (GDP) growth outlook for the country to 3.3 percent this year, down from the previous forecast of 3.8 percent. This is below the 3.5 to 4.5 percent target of the government for the year.
Mendoza said slower-than-expected investment recovery is a key risk to the Philippine economy, as public infrastructure spending continued to decline amid tighter budget controls and delays in project implementation.
It also revised its outlook for next year downward to 5.1 percent from 5.3 percent.
“For the Philippines to ride through the effects of external and domestic shocks in the near term, timely government spending on planned investments, especially in the social sector and critical infrastructure projects, will be important,” ADB Philippines Country Director Andrew Jeffries said.
Jeffries said there are already signs that the government is increasing spending on infrastructure, including major transportation projects, and plans to bring public investment back on track after the slowdown in the second half of last year and earlier this year.
“I know there's an intent to rebound public investment and get it back on track as compared to what happened the second half of last year and earlier,” Jeffries said.
“So, I think that's a big part of it,” he added.
Moreover, Jeffries said household spending, which accounts for about three-fourths of the economy, has also been affected by high inflation.
He argued that a slowdown in inflation could help support a recovery in household spending, while higher government spending could also boost growth.
Inflation outlook
ADB retained its inflation forecast for the country this year to 5.9 percent but raised that for next year to 4.4 percent from the previous 3.9 percent. Both are above the 2.0 to 4.0 percent target of the government.
“Food prices continue to be a key contributor to inflation and will likely remain under pressure with the effects of El Niño on agricultural output,” the ADB said in the report.
This, Mendoza said, could result in tighter monetary policy of the Bangko Sentral ng Pilipinas (BSP).
“Our baseline is actually for this year, for the monetary policy stance to remain tight,” Mendoza said.
Mendoza said monetary policy remains a “delicate tradeoff” between supporting economic growth and keeping inflation expectations anchored.
“So, a key consideration also for next year, going forward, is we also have to let the 75 basis points work through or transmit through the economy,” Mendoza said.
The BSP policymaking body Monetary Board has raised key policy rates twice this year, bringing rates to 5.0 percent.
Mendoza expects monetary policy to remain tight this year as the BSP continues to monitor inflation and economic conditions.
“It will really be largely data dependent; look at core inflation trends,” Mendoza said.
