Amidst lingering global and local uncertainties, the Philippine economy is poised to grow at 6.4 percent in 2019 and 6.5 percent in 2020 and 2021, according to the Philippines Economic Update (PEU) released here today by the World Bank.
These new estimates are lower than the previous World Bank forecasts of 6.5 percent growth in 2019 and 6.6 percent in 2020 released in January this year, owing to several factors including the delay in the 2019 budget approval and the slowing down of global trade that can lead to weaker demand for Philippine exports.
“The country’s growth outlook remains positive,” saidWorld Bank Country Director for Brunei, Malaysia, Philippines and Thailand Mara K. Warwick. “Higher private consumption due to lower inflation, steady growth of remittances, and election spending will fuel growth this year. Growth in public investment will be tempered in the first half of 2019 but is expected to recover in the second half of the year.”
Growth of the Philippine economy has historically been driven by consumption, with households contributing more than two-thirds of aggregate expenditures.
Annual private consumption growth declined from 5.9 percent in 2017 to 5.6 percent in 2018 due to high inflation. However, it is expected to rebound to 5.9 percent in 2019 and 6.0 percent in 2020 due to declining inflation and the continued job generation in the economy. Remittances are expected to remain steady as new employment opportunities for Filipinos become available in countries like Japan, Germany, and Poland, further fueling consumption.
The PEU, however, flags several risks that can affect the Philippines’ overall growth prospects, among them the delay in the approval of the 2019 budget and a looming drought. Under a reenacted budget, the report said, the government cannot implement new programs and projects, thus affecting public investment. The El Niño phenomenon that is expected to cause several months of dry spell might reduce farm output and raise food prices.
The report highlights the risks posed by external factors, including the potential escalation of trade tensions between the US and China and weak demand for the country’s exports. It also mentions potential challenges stemming from a strengthening US dollar, and hikes in US interest rates that could raise borrowing costs for the country’s infrastructure projects.
“In the short term, key priorities for sustaining the Philippines’ rapid and more inclusive growth include prudently managing fiscal and current account balances and preserving consumer and business confidence,” said World Bank Senior Economist Rong Qian. “As government ramps up spending to implement its inclusive growth agenda, it would need complementary reforms to increase revenue and ensure that the country’s finances are sound and sustainable.”
In the long term, the report says that the country needs to focus on raising investments in human capital (people’s health, nutrition, education and skills) to speed up inclusive growth or growth that benefits the poor and most vulnerable.
“The Philippines needs to address the high rates of malnutrition among children, improve learning, and the quality of healthcare, to unleash the full productive potential of Filipinos,” said Gabriel Demombynes, Program Leader for Human Development for Brunei, Malaysia, Philippines and Thailand. “The country needs to focus on these challenges while undertaking reforms for improving the country’s capacity to create more high-paying jobs and speed up poverty reduction.”
Child malnutrition in the Philippines is high. One in three children under the age of five is stunted—the principal marker of malnutrition—and stunting rates have been stagnant for more than a decade. Malnutrition is severe among children in poor households, unleashing a vicious cycle. Children who grow up in poor households are often inadequately nourished and thus more likely to suffer from limited cognitive development. As result, they may struggle to learn in school, are at high risk of dropping out early, and face an increased likelihood of poverty in adulthood.
In the Human Capital Index report released last year by the World Bank, the Philippines scored 0.55. This means that children born in the country today are expected to achieve only 55 percent of their potential income when they reach adulthood, compared to fully healthy children who receive a complete, high-quality education. Effective implementation of the government’s human capital initiatives (for instance, the Professional Standards for Teachers, Plan of Action for Nutrition, and Universal Health Coverage Law) will make it possible for the Philippines and all Filipinos to achieve their full potential.
China needs further reforms to make growth sustainable, greener and more inclusive
The Chinese economy continues to slow as it rebalances, with headwinds including trade frictions and the weakening global economy undermining exports and creating new uncertainties. Policy should focus on long-term strategies to move the economy towards greater domestic consumption and services, enhancing economic efficiency and ensuring that future growth is sustainable, greener and more inclusive, according to a new report from the OECD.
The latest OECD Economic Survey of China looks at the factors behind the economic slowdown as well as policies that can boost the quality of future growth and ensure that it is more equitably distributed. Despite the slowdown, the Survey projects growth above 6% this year and next, and sees continuing convergence with more advanced economies.
The Survey, presented in Beijing by OECD Deputy Secretary-General Ludger Schuknecht, underlines the rising financial risks from high corporate debt and recommends that China prioritises the creation of a single product and labour market to boost productivity and inclusiveness.
“China continues to be the major driver of world economic growth and convergence with advanced economies continues, despite the slowdown,” Mr Schuknecht said. “Yet China is at a crossroads, facing serious domestic and external challenges to maintaining its strong position over the long-term. Policy should seek to ensure a better functioning economy that delivers stable and inclusive growth for all.”
The Survey underlines the need for more balanced trade and investment. Policy should aim to further lower import tariffs and dismantle non-tariff barriers and barriers on the entry and conduct of foreign firms, in particular requirements to form joint ventures or transfer technology.
While much has been done to address financial risks, China’s ongoing fiscal stimulus should avoid directing credit to state-owned enterprises and local governments, the Survey said. Debt ceilings should take into account sub-national government revenues.
Prudent fiscal policy should channel funds to areas where returns are highest, such as education, health and social security systems, while avoiding misallocation of capital by allowing banks to better price risks. Risk perception could be sharpened by orderly defaults. The quality, coverage and timeliness of fiscal reporting can be improved, the Survey said.
The Survey sees wide scope to improve efficiency across the economy, notably by reducing the internal barriers that hinder product market competition and labour mobility. Strengthening the rule of law, restricting the power of administrative departments and providing clear and detailed implementation rules limiting their discretionary powers would reduce protectionism at the local level. Anti-monopoly rules and enforcement can be strengthened and public procurement processes could be made more transparent, technology-neutral and open to all players.
Other measures to boost economic efficiency highlighted by the Survey include stronger protection of intellectual property rights; gradual removal of implicit guarantees to state-owned enterprises, allowing them to default; and reduction of state ownership in commercially-oriented, non-strategic sectors.
To ensure equal opportunities, the Survey recommends China to distribute more evenly high-quality education and health care in order to reduce incentives to move to mega-cities. Gradually easing restrictions on access to public services for city residents without the hukou (residency permit) and eventually delinking service provision from the hukou would also help improve equity. Centralised financing of key spending items, such as wage bills in education and health, reforms to the floor and ceiling for social security contributions and wider tax reform should be pursued.
To make growth greener, the Survey suggests China enforce environmental regulations more strictly, raise fines for polluters and boost environmental taxation, particularly on fossil fuels. Putting an end to the construction of coal-fired power plants and increasing investment in pollution treatment facilities, urban water treatment and rural sanitation is also necessary.
Bhutan’s Economy to Moderately Grow in 2019 and 2020 on Strong Hydropower and Tourism Outlooks
Economic growth in Bhutan is forecast to strengthen moderately, buoyed by the industry and services sectors, according to a new Asian Development Bank (ADB) report.
The Asian Development Outlook (ADO) 2019, ADB’s flagship annual economic publication, forecasts the economy to grow at 5.7% this year and 6.0% in 2020. This is following the slipping of growth for a second year running to 5.5% in fiscal year (FY) 2018 on slower hydropower construction and temporary decline in electric power production.
“The expected commissioning of the Mangdechhu hydropower plant, strengthening of private spending, and increased government spending following the formation of a new government to implement the Twelfth Five-Year Plan will greatly contribute to growth,” said ADB Country Director for Bhutan Ms. Kanokpan Lao-Araya. “Inflationary pressure is anticipated following the recent announcement of expected pay rise of the public servants in Bhutan. A downside risk to growth forecasts would be any further delay in commissioning or lower-than-expected production capacity of the Mangdechhu hydropower plant.”
Inflation is expected to rise moderately from 3.6% in FY2018 to 3.8% in FY2019 before edging up to 4.0% in FY2020 as initial benefits from India’s goods and service tax (GST) taper and Indian inflation trends higher. Lower international oil price forecasts will help keep inflation at bay, but the planned revisions to civil service salaries and minimum wage might push up inflation, once implemented.
Current account deficit will continue to narrow further to a forecast of 16.9% of gross domestic product in FY2019, mainly on declining imports with the slowing of hydropower construction and a 6-month hiatus in capital expenditure as the country transitioned to a new administration. It is expected to shrink further in FY2020, as higher imports because of the picking up of government investment is offset by high export revenue from the full-year operation of the Mangdechhu hydropower plant.
Strengthening domestic resources toward better funding of development remains a challenge. With the expected graduation of Bhutan from the United Nations’ least developed country status in 2023, access to concessional official development assistance will increasingly be limited. Reforms have been undertaken to strengthen the mobilization of revenues to fund development. These include the creation of a stabilization fund to ensure even distribution of expenditure, a GST regime which is planned to be adopted in 2020, and reforms on provision of fiscal incentives. Fiscal incentives have been costly for the government with forgone revenue amounting to 17% of tax collected in 2017 only. Reduction of fiscal incentives, particularly tax reforms could be explored to raise government revenues, discourage the entry of footloose opportunists, while not deterring investors who see solid business opportunities in the country. Further, Bhutan needs to simplify the provision and administration of incentives without compromising the level of investment. As a complement to revenue reforms, public financial management needs further strengthening to ensure the proper collection and administration of revenue.
ADB has been supporting Bhutan since 1982, with strong emphasis on renewable energy production, transport connectivity, and key urban infrastructure projects. ADB has committed loans totaling $534.06 million, grants worth $269.22 million, and technical assistance amounting to $53.75 million for Bhutan. In 2018, it approved four projects, including two grant projects focusing on human resource development, particularly on skills and health development. Overall assistance aims to help generate revenue, support inclusive growth, and promote environmental sustainability.
SMEs turning to alternative financing instruments as growth slows in bank lending
Small and medium-sized enterprises (SMEs) are turning to non-bank financing sources at a faster pace than in the past, as bank lending to them has risen less than expected given today’s favourable credit conditions and business environment.
Financing SMEs and Entrepreneurs 2019: An OECD Scoreboard finds that online peer-to-peer lending and equity crowdfunding increased significantly in 2017, especially in countries with small markets. China, the United Kingdom and the United States continued to have the biggest online alternative finance markets for businesses. Venture capital investments were up in most countries, and the number of SME listings expanded by more than 13% in 2017, with total SME market capitalisation up 16.7%.
SMEs and entrepreneurs constitute the backbone of OECD economies, accounting for 60% of total employment and 50-60% of value added. They are key to strengthening productivity, delivering inclusive growth and helping economies adapt to changes like the digital transition, ageing populations and the changing future of work. This eighth annual edition of the OECD’s SME financing Scoreboard provides data on debt, equity, asset-based finance and financing conditions in 46 countries and an overview of policy measures to ease SMEs’ access to finance.
“Uptake of alternative financing instruments by SMEs is growing like never before, while bank lending to SMEs is growing less strongly. We need to monitor these developments closely to ensure that SMEs are well-equipped to invest and contribute to productivity growth,” said OECD Secretary-General Angel Gurría, launching the Scoreboard in Washington alongside Chilean Central Bank Governor Mario Marcel on the margins of the IMF/World Bank Spring meetings.
“Policy makers around the world have a key role to play to increase SME access to a diverse set of financing instruments. We are glad that the policy initiatives of the government of Chile are successfully strengthening access to credit and equity for SMEs, and reducing payment delays,” said Governor Marcel.
The 2019 Scoreboard finds that asset-based financing also grew, with leasing and hire purchase activities up by a median rate of 6.2%.
SME loans grew at a median of close to 5% in a majority of middle income countries in 2017, while SME lending stagnated in the United States and the United Kingdom, and fell in European countries most affected by the financial crisis over the same period.
Credit conditions and interest rates remained favourable. The median value of the average interest rate charged to SMEs fell for the 7th year in a row, and SME bankruptcies dropped for the fourth consecutive year in 2017. On the other hand, some segments of SMEs continued to face difficulties in accessing finance. This is the case in particular for micro-enterprises, innovative ventures, start-ups and young firms.
Countries continued to do more to foster SME access to bank and alternative sources of finance by adapting regulations and introducing targeted policies to support Fintech. Credit guarantees, the most widespread instrument to ease SMEs’ access to finance, have been expanded in scale and volume, and better targeted to specific firms. The OECD is working to further expand the evidence base on SME access to finance and support governments in improving their policies in this area.
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