THE Organisation for Economic Co-operation and Development (OECD) trimmed its gross domestic product (GDP) growth forecast for the Philippines for this year.
In its latest Economic Outlook for Southeast Asia, China, and India update, the OECD said it now expects Philippine GDP to expand by 5.6% this year, slightly lower than the 5.7% projection in March. This is below the government’s 6-7% GDP growth target for this year.
The OECD kept its 2024 growth projection at 6.1%, which is still below the government’s 6.5-8% target.
“A key growth driver in the second half of 2023 will be a strong rebound in government spending, from its 7.1% contraction in the recent quarter, executed through catch-up plans and frontloading of programs and projects,” the OECD said.
“Fiscal stimulus activities are also being implemented which should fuel activities of both the public and private sectors,” it added.
The Philippine economy grew by 4.3% in the second quarter, slower than the 6.4% growth in the first quarter and 7.5% in the second quarter of 2022. In the first half, GDP growth averaged 5.3%.
The OECD said elevated inflation and higher borrowing costs dragged private consumption and investments in the second quarter. The slowdown was also amplified by the contraction in government spending, it added.
For the rest of the year, the OECD said that domestic demand is expected to drive growth, “supported by labor market expansion, personal income tax cuts, stable inflows of remittances and the steady recovery of tourism.”
“On the supply side, the services sector will continue its steady upward trajectory and will remain a reliable source of economic activity, boosting GDP growth, due to the improved outlook of tourism as well as rapid growth of the business process outsourcing industry,” it added.
With fiscal consolidation “underway,” the OECD expects the Philippines’ budget deficit to narrow from this year to 2025.
On the other hand, the OECD said that trade prospects in the next few months may be bleak.
“Prolonged weak external demand from the United States and China, the country’s top trading partners, will continue to drag down exports in the coming months,” it said.
The Philippines’ lack of diversification of exports leaves it vulnerable to sector-specific risks.
“For example, the Philippines recorded a decline in exports in the first and second quarter of this year owing to its heavy reliance on electronics products and dependence on the United States and China as major trading partners,” the OECD said.
The Semiconductor and Electronics Industries in the Philippines Foundation, Inc. (SEIPI) expects electronics exports growth to be flat this year. Data from SEIPI showed total electronics exports declined by 7% to $21.19 billion in the six-month period.
The OECD noted that private investment is also expected to slow due to high interest rates and a weaker global economy. On the other hand, landmark reforms and improving investor sentiment could help the country attract more foreign direct investments.
Meanwhile, the OECD said high borrowing costs will continue to weigh on growth.
“The Philippine central bank is likely to maintain a high interest rate regime, which will dampen GDP growth should pent-up demand ease,” it said.
To curb inflation, the BSP raised borrowing costs by 425 basis points (bps) from May 2022 to March 2023, bringing its key rate to a near 16-year high of 6.25%.
Another downside risk to the Philippine growth outlook is the still elevated global inflation, which could prompt further tightening from central banks in advanced economies and may trigger capital outflows, the OECD said.
“This could push down the value of the Philippine peso, which is forecast to recover mildly from a sharp depreciation episode in 2022. The persistent global financial turmoil could translate into higher borrowing costs for the government, adding pressure to its public debt,” it said. — Luisa Maria Jacinta C. Jocson