Infrastructure Drive, Strong Domestic Demand to Sustain Philippine Growth

The Philippines’ economic growth is expected to sustain its quick pace in 2018 and 2019 as the government’s infrastructure program is rolled out, says a new Asian Development Bank (ADB) report.

In its new Asian Development Outlook (ADO) 2018, ADB projects Philippine gross domestic product (GDP) growth at 6.8% this year and 6.9% in 2019, up from 6.7% in 2017. Rising domestic demand, remittances, and employment, in addition to infrastructure spending, will drive growth. ADO is ADB’s flagship annual economic publication.

“Along with domestic demand, the government’s infrastructure investments will fuel the country’s growth in the next few years, supported by a sound economic policy setting,” said Kelly Bird, ADB Country Director for the Philippines. “We expect this growth to further lift wage employment numbers, add to household incomes, and benefit more poor families across the archipelago.”

The Philippines remained one of the strongest growing economies in Southeast Asia in 2017. Domestic investment recorded 9% growth last year, moderating from a brisk 23.7% in 2016, although growth in fixed investment in industrial machinery, transport equipment, and public construction remained robust. Household consumption grew by 5.8% in 2017, from 7% in 2016, on the back of higher remittances and employment, with the unemployment rate falling by 1.3 percentage points to 5.3% in January 2018 as 2.4 million jobs were added. Public spending rose by 7.3% last year from 8.4% in 2016.

Consumer price inflation reached 3.2% last year from 1.8% in 2016 due to strong economic growth, higher international fuel prices, and Philippine peso depreciation, but well within the 2% to 4% target by the Bangko Sentral ng Pilipinas—the country’s central bank. The country’s external debt further declined to 23.3% of GDP in 2017, from 24.5% of GDP in 2016.

Moving forward, ADB projects services will continue to drive GDP growth, along with manufacturing and construction industries. The approval of the Tax Reform for Acceleration and Inclusion law in December 2017 will augment tax revenues and provide additional fiscal space for more progressive public spending. The policy reforms are expected to yield additional 90 billion to 144 billion Philippine pesos ($1.73 billion to $2.76 billion) in tax revenue collection in 2018 and 2019, respectively.

With economic growth gaining momentum, inflation is projected to reach 4% in 2018 as global oil and food prices rise, and higher excise taxes on some commodities take effect. In 2019, meanwhile, inflation is expected to marginally decline to 3.9%.

The report notes there are external risks to the Philippines’ growth outlook from heightened volatility in international financial markets and uncertainty about global trade openness, although the country’s strong external payments position would cushion these effects.

A major policy challenge to the country’s growth outlook, according to the report, is managing the rollout of the government’s “Build, Build, Build” infrastructure program, which is expected to raise public infrastructure spending to 7.3% of GDP by 2022 from 4.5% in 2016. The report provides suggestions on ways to enhance government capacity, including strengthening coordination between government agencies and improving technical capacity of staff within these agencies, and fostering stronger partnerships between government agencies, the private sector, and development partners.