The Philippines is not immune to the effects of the financial turmoil in the United States but it is in a better position to respond to the impacts, an economist from the Asian Development Bank (ADB) said today during the release of the bank’s growth forecast for the region.

“The Philippine cannot be insulated…but there have been macroeconomic policies that have make it less vulnerable and in better position to respond to the negative impacts of these events,” said Thomas Crouch, ADB’s deputy director general for Southeast Asia, during the release of update of the Asian Development Outlook (ADO) Tuesday.

“The cost of insulating is very high,” said Neeraj Jain, ADB’s country director for the Philippines. “It will be bad for the Philippines to cut itself from the global market.”

Jain said fiscal space created by policies implemented during the past two to three years will curtail or limit the impact of these events.

The ADB economists gave their comments as the financial crisis in the US spread following the events on Wall Street, where Lehman Brothers filed for bankruptcy protection and rival Merrill Lynch agreed to be sold to Bank of America for $50 billion.

Slower economic growth

The ADB has trimmed down its economic growth forecasts and raised inflation projections for the Philippines. The Manila-based multilateral bank forecasts a 4.5 percent and 4.7 percent economic growth in 2008 and 2009, respectively. The figures are below the 6.0% and 6.2% projected in April.

The Philippine economy slowed down this year, after expanding at its highest rate in three decades in 2007. GDP growth for the 2nd quarter of 2008 reached 4.6 percent, down from 8.3 percent during the same period last year.

“Two of the country’s main growth drivers, private consumption on the demand side and services on the production side, have lost momentum,” the ADO said. Higher prices of food and fuel, the report said, have combined to push inflation and undermine consumer spending.

The study noted that while private consumption grew at about 6% every quarter in 2007, it only posted a 5.2 percent growth in the first quarter and went down to 3.4% in the second quarter.  Meanwhile, services sector grew only by 5.4 percent during the first half of 2008, compared to 8.4% a year earlier.

“Weaker expansion was recorded for financial services, retail trading, transport and communications, apparently related to the softening in consumption,”  the report said.

Higher inflation

The ADB raised its inflation forecasts to 10.5 percent in 2008 and 8.0% in 2009, which are higher than the April forecast of 4.0% and 3.6%, respectively.

Consumer prices increased by 7.6% during the first half of 2008 and inflation reached a 17-year high of 12.5 percent in August.

“The Philippines, currently the largest importer of rice, faced soaring global prices in the first half. Prices of fruits and vegetables rose because of typhoons, and meat prices increased as animal-feed cost moved up,” the report said.

Expand tax revenue

The report said the Philippines must emphasize the need to expand tax revenue base. “Efforts to strengthen tax revenues will need to be stepped up to fund higher spending, particularly if weak global financial markets make it more difficult to achieve targeted privatization receipts,” the report said.

“Higher revenue growth is required over the medium term to achieve both fiscal consolidation, which is a key in maintaining global investor confidence and to pave way for the greater spending on infrastructure and development,” the report added.

Fuel prices

High oil prices, the report also noted, will stay in Asia and dampen growth and force governments to make policy adjustments encouraging increasing energy efficiency.

The ADO said the recent drop in oil prices will be short lived and the region’s explosive growth will put further pressure on the supply of oil and keep the prices high. --with a report from Reuters (abs-cbnNEWS.com/Newsbreak)

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