Strong peso to hurt PH growth in 2013, 2014 – think tank

MANILA, Philippines – The continuous appreciation of the peso is expected to slow the country’s economic growth to 6.1% in 2013, according to a New York-based think-tank GlobalSource Partners.

The Philippine economy posted a 6.6% growth in 2012 while the government is aiming to hit a 6% to 7% growth in 2013.

“From a high of 6.6% in 2012, we expect the pace of growth to slow a bit to 6.1% in 2013 as weak external growth and a strong local currency weigh down exports,” GlobalSource Partners said in its report released on Monday, February 11.

The peso closed 6.5% higher at P41.05 against the US dollar in 2012 and has been trading near P40 in recent weeks this 2013. It is expected to further appreciate to the P37.50 level in the next 12 months.

The strong peso has been worrying local economists, dollar earners like exporters and business process outsourcing (BPO) firms, as well as Filipinos who depend on remittances sent by loved ones working or living abroad. The appreciation of the peso is expected to continue beyond 2013. 

External threats

The GlobalSource Partners report, co-authored by former Finance Undersecretary Romeo Bernardo, said that while the Philippine economy is seemingly on a roll, the unresolved crisis in the West still poses challenges to growth.

The think tank expects dollar remittances from overseas Filipinos to slow this year from a 6% growth last year, in light of weak labor market conditions and continuing unrest in the Middle East.

Remittances account for about 10% of the country’s Gross Domestic Product (GDP) while consumption spending from remittances and earnings account for about 70%.

“However, dollar remittances in the past have proven quite resilient despite weak economic conditions outside and may thus surprise again on the upside. This resilience is due partly to the skill and geographic diversity of overseas workers, partly to the demands of aging populations elsewhere for younger workers and in light of the peso’s strength, partly to overseas workers adjusting their remittances to preserve peso values,” the report also said.

GlobalSource said higher state spending, further expansion in private investments and election spending would aid consumption growth.

Election-led growth

On the contribution of election spending, GlobalSource said household spending would benefit from the May polls but this is likely to start slowing after the elections.

“In particular, household spending which is about 70% of GDP is expected to benefit from election spending, low inflation and interest rates. We expect continued healthy growth at the start of the year but which is likely to start slowing after the May elections,” Global Source said.

On the government’s fiscal position, GlobalSource said last year’s budget gap is likely to just sum up to 2.2% of GDP for the full year, below the programmed 2.6%.

Tax effort

Nonetheless, GlobalSource said the Aquino administration is likely to improve its tax effort this year because of refinements in tax administration.

“We estimate the tax effort to go up another 0.5% of GDP this year to 13.3%, reaching 13.8% next year (2014), which falls below government’s target of achieving a tax effort in excess of 14% by 2014,” it said.

The think-tank also urged the government to solve its smuggling problems, particularly oil-based products, to improve tax effort.

“Overall, we expect the budget deficit to slightly breach government’s 2% target in the next two years but with government’s declining interest cost, the debt dynamics will result in further reductions in the debt ratio,” it said. – Rappler.com