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19 January 2010

Philippine economy seen growing 4.2% in 2010

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The UK banking giant sees the Philippines growing at a much faster pace this year on the back of strong remittance inflows and election-related spending, but sees the need for the local central bank to tighten monetary policy soon to curb emerging consumer price pressures, reported Philippine Daily Inquirer.

In a briefing yesterday, visiting HSBC economist Frederic Neumann added that a key challenge for the next President would be to reform the country’s tax system to prevent a runaway budget deficit.

Neumann sees the Philippines posting a higher gross domestic product (GDP) growth of 4.2 percent compared to last year’s 1.1 percent—also better than the market consensus forecast of 3.6 percent—but noted that the growth rebound won’t necessarily benefit the government’s tax collections.

He said the government’s budget deficit would likely expand to 370 billion peso or 4.4 percent of GDP this year from an estimated 305 billion peso in 2009, noting that it had historically been difficult to shore up revenues during an election year.

“A deficit of 370 billion peso is still manageable, but it’s very important that the incoming administration continues the policy of the previous administration to make sure the budget deficit doesn’t go the way of the Estrada administration’s,” Neumann said.

He added that the taxation system of the Philippines was structured in such a way that revenues do not necessarily track economic growth. As such, he said the next Congress under the new administration may draft new tax measures to stabilize the government’s fiscal position.

“If there’s one thing that the Philippines needs, it’s a stable budget deficit. You can afford a higher budget deficit now than a few years ago but going forward, to have credibility, there must be lasting improvement in the budget deficit,” Neumann said.

On the other hand, Neumann said the higher GDP growth rate for the Philippines this year, which could further accelerate to 4.6 percent next year, would be still underpinned by remittance flows, which could grow more than 5.8 percent as demand from emerging markets help perk up a global recovery.

But he said the policymakers in the Philippines and the rest of the Asian region should watch out for two key risks. One is the resurgence in food and fuel prices which in turn were starting to drive up inflation in the region. The other is the growing risk of a financial bubble as the loose monetary policy in the West push out more funds to higher-yielding emerging markets.

He said the Bangko Sentral ng Pilipinas (the central bank) may have to raise interest rates by a total of 75 basis points this 2010 beginning at the end of the second quarter and by 25 basis points each during the third and fourth quarters.

He said the BSP may also have to tolerate a further peso appreciation against the US dollar such that the exchange rate may end this year at 43 peso to the US dollar.


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