MANILA, Philippines - The World Bank trimmed its growth forecast for the Philippines this year to 6.6%.
This is slightly lower than the 6.7% gross domestic product (GDP) growth forecast the World Bank gave last October, and on the low-end of the government's 6.5%-7.5% target for 2014.
In 2013, the Philippine economy grew by 7.2%.
In its East Asia Pacific Economic Update released on Monday, the World Bank said despite the challenges in the global economy and the impact of "Yolanda," the Philippines is likely to continue its high growth in the medium term.
While "Yolanda" damage is likely to pull down consumption growth, the report noted that reconstruction spending can partially offset the decline in GDP growth.
"The Philippines is forecast to grow at 6.6 percent in 2014 and 6.9 percent in 2015, with reconstruction spending offsetting the drag on consumption from the effects of the 2013 earthquake and typhoon," the report said.
In 2016, the World Bank forecasts Philippine growth at 6.5%.
"These projections crucially depend on the speed and scope of the reconstruction program. In the short term, a well-designed and rapidly executed recovery and reconstruction program to 'build back better” can boost economic growth beyond current projections. This means explicitly mandating standards for safe and resilient buildings and infrastructure and for risk-informed land-use planning, and ensuring that these are implemented well. Over the medium term, growth prospects can be enhanced by a sustainable ramping up of infrastructure spending," it said.
Unlike last year when the Philippine economy was the second fastest in Asia, the report showed it is expected to lag behind Timor-Leste (8%), Myanmar (7.8%), Cambodia (7.2%), Lao (7.2%), China (7.1%) and Indonesia (7.6%) in growth this year.
However, the World Bank identified several downside risks to Philippine growth - "slower global recovery, financial market volatilities following the tapering of the U.S. stimulus program, potential bubbles in the real estate sector, slower post-typhoon reconstruction, and domestic reform lags."
Despite its strong macroeconomic fundamentals, the Philippines "will still be affected by regional contagion, given the large share of financial market assets held by foreigners."
"Unchecked growth of the real estate sector, including shadow financing for real estate, is a source of risk," the World Bank report said.
It also noted that slow pace of reconstruction spending could pull down the Philippines' economic growth this year by up to 0.6 percentage points.
Job seekers attend a job fair in Manila, Philippines. Photo by Romeo Ranoco, Reuters
Also, the World Bank cited the country's slow progress in reducing poverty and creating jobs, despite strong economic growth.
The National Statistical Coordination Board last December reported that poverty incidence barely moved from 26.3 percent in 2009 to 25.2 percent in 2012.
"Underlying the slow progress in poverty reduction is the lack of good jobs, which could have reduced the vulnerability of millions of Filipinos who are likely targets of calamities. As of 2012, around 10 million Filipinos were either unemployed (3 million) or underemployed (7 million). In addition, around 1.15 million Filipinos enter the labor force every year. However, only a fourth of them find good jobs in the country," it said.
The World Bank said the Philippines should focus on "generating higher, sustained, and more inclusive growth", which will create more jobs and reduce poverty.
"More and better jobs can be created by accelerating reforms to protect property rights, promote more competition, and simplify regulations, while sustainably ramping up public investments in infrastructure, education, and health. However, fiscally sustainable increases in investment levels are only possible through a combination of more efficient government spending and increased revenues from new tax policy and administrative measures. With these reforms, the private sector will have the incentive to invest more and create jobs, and the country can attract more investments as the economic rebalancing in the world’s most dynamic region takes place," it said.
Developing Asia still fastest-growing region
The World Bank trimmed its 2014 growth forecast for developing East Asia but said the region's economies were likely to see steady growth in the next couple of years, helped by a pick-up in global growth and trade.
The Washington-based development bank expects the developing East Asia and Pacific (EAP) region to grow 7.1 percent in 2014 and 2015, down from the 7.2 percent rate it had previously forecast for both years.
Growth in 2016 is also seen at 7.1 percent, staying slightly below the 2013 growth rate of 7.2 percent.
"Stronger global growth will help most developing East Asia Pacific (EAP) countries grow at a steady pace while they adjust to tighter global financial conditions," the World Bank said in its latest East Asia Pacific Economic Update report.
"The tailwinds from improving global trade will offset the headwinds from the tightening of global financial markets."
Emerging markets, including those in Asia, had been roiled by capital outflows from around May to September last year as investors began positioning for the U.S. Federal Reserve to start tapering its monetary stimulus.
While financial markets in the East Asia Pacific region have shown a muted reaction to the Fed's actual decision in December to begin scaling back its quantitative easing, the possibility of capital flow reversals remains a concern for developing countries in the region, the World Bank said.
"Going forward, higher global and domestic interest rates, rather than more volatile capital flows and financial markets, may be the greater concern," it added.
The prospects for a normalisation of U.S. policy rates will put upward pressure on interest rates and could trigger more sizeable capital outflows from weaker economies, as well as make debt management more difficult in countries where leverage has risen, the bank said.
"Overall, as interest rates rise, developing countries will face higher capital costs, which will weigh on investment and growth in the medium term," it added.
The World Bank trimmed its 2014 growth forecast for China to 7.6 percent, from 7.7 percent previously. It kept the 2015 growth forecast for China steady at 7.5 percent, down slightly from 7.7 percent actual growth in 2013.
The new 2014 outlook reflected "the bumpy start to the year," it said, noting that China's industrial production and exports had been weak in the January-February period.
"While the growth rate of industrial production has slowed, and exports contracted in the first two months of 2014, the trend is nevertheless strengthening, and we expect quarterly growth to rise at midyear as external demand from the high-income countries solidifies," the World Bank said.
Among Southeast Asian economies, the biggest changes in the World Bank's economic forecasts were for Thailand and Myanmar.
It cut its forecast for Thailand's economic growth to 3.0 percent in 2014 and 4.5 percent in 2015, from its previous forecasts of 4.5 percent and 5.0 percent, respectively.
The World Bank said a recovery in external demand would lift growth in Thailand compared with the 2.9 percent actual growth in 2013.
Domestic demand in Thailand, however, remains dampened because of the ongoing political unrest, which has affected tourism receipts, public investment and investor confidence, it said.
"If the political situation stabilizes sufficiently ... growth will be stronger in 2014," the bank said.
Growth in Myanmar is likely to stabilise at 7.8 percent in 2014-2016, after the government made progress in 2013 on macroeconomic reforms, it said. The World Bank had previously forecast 6.9 percent growth for Myanmar in both 2014 and 2015.
The World Bank said downside and upside risks to growth in developing East Asia Pacific countries were evenly balanced.
"At the global level, a slower-than-expected recovery in advanced economies or a steady rise in interest rates, coupled with increased volatility in commodity prices due to recent geopolitical tensions could mean a less hospitable environment for growth," it said.
A steady global recovery, however, could help open the way for deeper reforms, such as steps needed to create the ASEAN Economic Community by 2015, it said.
A disorderly rebalancing in China could hurt the growth outlook for commodity exporters, while a successful rebalancing could give a boost to regional trade partners, the bank said. - With report from Masayuki Kitano, Reuters