Political uncertainty main risk to growth

The Philippine economy is seen sustaining its robust growth in the medium term but London-based economic research firm Capital Economics red-flagged risks from political uncertainty.

“We expect the economy to grow strongly over the next couple of years. The main risk to the outlook is the uncertain political situation, which risks unnerving investors and undermining planned reform,” Capital Economics said in a chapter on the Philippines titled “Strong prospects risk being undermined by politics” in its April 11 report on Asia titled “Stronger exports to boost growth in 2017.”

Capital Economics said it expected the gross domestic product (GDP) to expand 6.5 percent this year, the lower end of the government’s growth target of 6.5-7.5 percent.

For 2018 and 2019, Capital Economics projected a 6.5-percent and 6-percent GDP expansion, respectively, below the 7-8 percent annual goal of the Duterte administration from 2018 until 2022.

In the Philippines, “stronger global growth should provide a boost to export demand over the next year,” Capital Economics said, adding that the outlook for domestic demand was also positive.

“Strong income growth, healthy household balance sheets and buoyant remittances should help to support private consumption growth, which accounts for around two-thirds of GDP,” Capital Economics said.

The government’s plan to ramp up infrastructure spending by widening the budget deficit cap to 3 percent of GDP in the medium term will also help bolster the economy, Capital Economics said. “Government spending is also likely to remain strong. President Duterte has signaled that he intends to build upon the efforts of his predecessor in increasing infrastructure spending to address the historical problem of underinvestment. The low level of government debt means there is scope for the government to increase spending.”

According to Capital Economics, healthy fundamentals mean the economy is well-placed to grow strongly over the medium term as the country has some of the most growth-favorable demographics in the region.

“Reforms under the previous administration of Benigno Aquino, which have helped to support a boom in the business outsourcing sector, are likely to continue to pay dividends,” Capital Economics added. Alongside overseas Filipino workers’ remittances, the BPO industry is among the country’s biggest dollar earners.

However, Capital Economics said the main risks to the outlook centered on the uncertain political outlook.

“[President] Duterte’s numerous offensive statements, his controversial war on drugs and his abandoning of the country’s long-standing security alliance with the US risk unnerving investors, which may make them think twice before committing to long-term investments in the country,” Capital Economics warned.

It added that there was also a risk that Duterte’s fixation on law and order would distract from reforms needed to enhance growth, citing that while the tax base needed to be expanded in order to support increased government spending, proposed reforms have so far stalled in Congress.

Before it went on Lenten break, the House ways and means committee reverted the first package of the comprehensive tax reform program being proposed by the Duterte administration back to the technical working group as it wanted to consolidate other similar House bills with the Department of Finance’s version.

But as a whole, Capital Economics said “the upshot is that, notwithstanding some risks, we see plenty of potential for the economy to continue growing at a decent pace.”