Good news from the World Bank

By Fernando Fajardo
Cebu Daily News
11/06/2009


In its latest East Asia and the Pacific Update, the World Bank says East Asia’s rebound from the economic downturn has been surprisingly swift and very welcome. It credits the rebound to the vigorous and timely fiscal and monetary stimulus in most countries in East Asia, along with decisive measures in developed economies to prevent a financial meltdown after the collapse of Lehman Brothers, adding that the shift to inventory restocking since mid-2009 has also helped boost growth.

In view of these factors, WB now raised its projected real Gross Domestic Product (GDP) in developing East Asia by 1.3 percentage points compared to its previous forecast in April. All in all, real GDP is set to grow by 6.7 percent in 2009.

The WB noted, however, that East Asia’s rebound is largely influenced by China. Without China, the recovery of the rest of the region is less vigorous. It says, for example, that for 2009, output is projected to contract in Cambodia, Malaysia and Thailand and barely grow in Mongolia and some of the Pacific islands and that even with solid growth in Indonesia and Vietnam, developing East Asia, excluding China, is projected to grow more slowly in 2009 than South Asia, the Middle East and North Africa, and only modestly faster than Sub-Saharan Africa.

In the case of the Philippines, the World Bank says that the remarkable resiliency of remittance flows has been surprising but welcome. Despite the global crisis, OFW remittances growth remains positive, although much slower this time than in previous years. In real peso terms, though, remittances rose by 12 percent year on year in January-August after contracting 2.9 percent in 2008. The reason for the difference is the weaker peso this year.

For this and other reasons, the WB now projects the Philippine GDP to grow by 1.4 percent for the whole year of 2009. Previously, it forecasted the Philippine GDP to drop by 0.3 percent. The new forecast is within the range of the official Philippine government’s forecast of a GDP growth of between 0.8 percent to 1.8 percent in 2009.

Philippine financial markets have rebounded significantly while real estate prices are contracting moderately, the WB said in its update. It also noted that equity prices rose 46 percent from the start of the year, while spreads on foreign currency denominated government bonds fell 177 basis points, which is only 30 basis points higher than on September 15, 2008.

However real estate prices in the Philippines remain under pressure. It noted that land prices in prime locations in Manila were down by 3.1 percent in the second quarter from the first, and that given existing vacancies and projected new supplies coming in the market, prices are expected to contract further over the next twelve months.

One concern the WB mentioned for the Philippines is the fiscal deficit which has widened substantially because of weaker revenues and the need for fiscal stimulus package calling for frontloading of spending. The WB noted that while spending grew by 15.2 percent from a year earlier in September, tax revenues contracted by 8.5 percent year on year in September. It also pointed out, however, that about two-thirds of the contraction reflects tax cuts implemented in 2008 and 2009.

Accordingly, low inflation and a stable exchange rate helped the Central Bank cut its key policy rate by 200 basis points this year, but the pass-through to bank lending rates has been slow and partial, the WB said. Bank lending rates fell only by 120 basis points this year and that overall, 12-month growth in bank credit (net of placements in the central bank) slowed to 5.9 percent by August from double digits that prevailed most of 2008.

The WB says that in the Philippines the adverse impacts of the crisis on the social sector are easing but that recent typhoons may have led to renewed duress.

In the labor market, the WB noted that the share of wage and salaried workers in total employment increased in July compared to April 2009. It also noted that hunger incidence recently receded from what it was during the height of the food and global financial crises.

Despite these good things, WB estimated that the global economic recession will still leave an additional 1.4 million Filipinos in poverty by 2010 compared with a counterfactual scenario of no crisis, adding that damages and losses inflicted by typhoons Ondoy and Pepeng would worsen poverty incidence even further.

In conclusion for the Philippines, the WB says that while the country weathered the global crisis comparatively well, important challenges exist to generate inclusive sustainable growth. It says in particular that there is a need to balance the country’s medium-term need for fiscal consolidation with the risk of a premature unwinding of the fiscal stimulus.

For the Philippines to reach a higher growth path, the WB says that it would require increasing the share of investment in the economy, especially in infrastructure and that to do this the business climate must be improved.