World Bank sees 5.8% PH growth in next 2 years

The World Bank expects the Philippines to grow by 5.8 percent in 2024 and 2025 but still estimates a modest 5.6 percent gross domestic product (GDP) turnout this year, slower than previous forecasts, due to both external and domestic risks such as geopolitical tensions, trade issues, and climate-related disruptions.

In a press briefing on Tuesday, Dec. 5, where World Bank economists presented the December 2023 Philippines Economic Update (PEU), the previous 2023 estimate of six percent growth was downgraded primarily due to external conditions, but continued measures to contain high inflation, and effective investment reforms will ensure sustained growth, it said.

Basically, the December PEU is unchanged from the October East Asia Pacific (EAP) report. According to Ralph Van Doorn, World Bank Senior Economist, the “slight downgrade” in GDP forecasts compared to earlier in the year was due to the “disappointing growth both global and local and the slower Q2 (second quarter) growth (domestic).”

The local economy reported a lower-than-expected 4.3 percent GDP growth in the second quarter which improved to 5.9 percent in the third quarter, but still lower than the six to seven percent government projection. As of end-third quarter, GDP average growth of 5.5 percent is lower compared 7.7 percent in the first three quarters in 2022.

For 2024 and 2025, the World Bank forecasts 5.8 percent growth for the Philippines. Previously, it only announced a 5.8 percent growth for next year.

“(The 5.6% 2023 growth) is expected to be followed by a rebound of growth in 2024 to 2025. That will be driven by improvement in domestic demand with services expected to drive growth due to ongoing recovery of tourism sector and consistent performance of the IT-BPO industry,” said Van Doorn.

He also expects that higher domestic demand in the next two years will “create jobs, increase household income, and benefit consumption in tourism and related industries.”

The World Bank economist said a modest increase in global trade growth along with East Asia economic expansion will also contribute to stronger trade and manufacturing growth in 2024 and 2025.

Consumption is still projected to provide the growth engine, supported by robust labor market, steady remittances growth and lower inflation, said Van Doorn.

“We also expect investment growth to pick up in the next two years due to investment reforms and a commitment to maintain a high level of public investment despite the ongoing fiscal consolidation,” he said.

In addition, he said the country’s fiscal deficit “will remain on track to fall, to gradually narrow, to 3% by 2028 and the public debt level will start to decline.”

Meanwhile, the Philippines’ headline inflation is expected to close the year at 5.9 percent which was a lower forecast compared to the Bangko Sentral ng Pilipinas’ (BSP) 6.1 percent, while for 2024 and 2025, the consumer price index is estimated to drop to 3.6 percent and three percent – both within the target range of two percent to four percent.

As for the Philippine peso, currently steady at mid-P55 level versus the US dollar, the World Bank said the local currency has weakened since the start of 2023 despite a balance of position surplus, healthy flow of remittances, and IT-BPO and tourism revenues as source of foreign exchange.

“The peso generally tracked the movements of its peers, as other regional currencies such as the Indonesian rupiah, Thai baht, Malaysian ringgit, and Vietnamese dong have also weakened since the start of the year,” said the World Bank. In real effective terms, the peso has appreciated by 1.8 percent against the basket of currencies of its major trading partners.

Van Doorn said the balance of risks remain tilted to the downside as far as growth is concerned. External risks emanate from possible escalation of geopolitical tensions which could lead to additional food and energy supply shocks and placing additional pressure on inflation.

The other external risk is trade restrictions on agricultural products which may cause supply disruptions and could increase volatility in commodity prices. In other advanced economies with still elevated core inflation, there is also the risk that a high interest rate environment will remain, or even higher for longer than expected.

On the domestic front, the risks will still come from the threat of the El Nino and other climate disturbances that may yet again raise supply challenges, said Van Doorn.

Based on the actual PEU report, it noted that for the country to improve the long-term growth potential, “it is imperative to address low productivity and structural challenges, including underinvestment in physical and human capital."

“Effective implementation of pro-investment reforms in renewable energy and sectors like trade, transport, and telecommunications would generate economy-wide productivity gains, estimated at 3.2 percent on average,” it said, adding that implementing reforms that encourage private sector participation in investments “could enhance the growth potential, even within the constraints of limited fiscal space.”

The World Bank also noted that “effective public spending in agriculture could boost productivity and enhance the local food supply, thereby reducing the impact of food price shocks that disproportionately affect the poor” and that “reforms that strengthen the resilience of water supply and sanitation, education, human settlements, and health care systems could mitigate the effects of climate change, public health crises, and natural disasters in both the short and long term.”

World Bank’s Ndiamé Diop, the Country Director for Brunei, Malaysia, Thailand and the Philippines, said high inflation, elevated interest rates, and global uncertainties due to the Ukraine war and Middle East conflict will affect both growth and investments.

“Persistently high inflation amid volatility in global commodity prices, the high cost of borrowing for businesses and households, and geopolitical uncertainty have affected private investments,” he said, and that “full implementation of key recent reforms is important to mitigate these challenges, stimulate private investment, and promote job creation and poverty reduction."

The World Bank cited the country’s enacted legislations to boost private investments in the past years. Reforms include amendments to the Public Services Act, the Retail Trade Liberalization Act, the Foreign Investment Act, the Renewable Energy Act and the new Public-Private Partnership Code.

Sustaining the country's efforts towards fiscal consolidation, which involves reducing fiscal deficits and improving revenue intake, will strengthen the business environment by enabling businesses to make long-term investment decisions with greater confidence, supporting job creation, increased productivity, and overall economic growth, said the World Bank.