MANILA, Philippines – The Philippines needs to “move up the value added chain” if it is to reach its target of 8.5 percent growth by 2016, an investment bank said on Thursday.
“The trend growth for the last 10 years was around five percent. To increase that to eight percent, that would entail a couple of things,” said Mark Tan, executive director for Global Economics, Commodities and Strategy Research of Goldman Sachs.
The bank forecast stable economic growth for the country at the range of 5 to 6 percent fromn 2013 to 2016.
The country, which expanded by beyond-target 6.6 percent last year, is forecast to slow down to 5.5 percent this year and the next before picking up again to 5.6 percent and 5.8 percent in 2015 and 2016, respectively.
The outlooks fall well-below government’s medium term targets: 6 to 7 percent this year, 6.5 to 7.5 percent in 2014, 7 to 8 percent in 2015 and 7.5 to 8.5 percent in 2016.
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Consumption has held up but more work needs to be done in infrastructure development, labor productivity and the relation between the two to maximize the country’s growth potentials, Tan told reporters.
In particular, “better labor skills” coupled with continued accumulation of capital will be a good combination toward achieving the Aquino administration’s targets. The public-private partnership (PPP) initiative, despite some delays, will also be worth pursuing.
“It also needs to do more focus on labor productivity, upgrading skills and moving up the value added chain… It bodes well for the acceleration of growth,” Tan said.
Similar things have been done in other Southeast Asian nations, specifically in bridging infrastructure gap, he noted. For the region, Goldman Sachs has forecast growth of 5.4 percent (2013), 5.6 percent (2014), 5.8 percent (2015) and six percent (2016).
Since its launch in November 2010, only two PPP projects have been awarded, eight are in the bidding process, while many others remain in the pipeline. Tan said this is no cause of worry, but warned against “structural impediments” that could derail growth in the long run.
“People who have invested in the Philippines for a long time, they understand the Asian perspective, they know it will take time. But as long as they see things moving in the right direction… then the market would not be disappointed,” Tan said.
“What is more sort of a major downside are structural impediments or the inability to execute basically,” he added.
On the other hand, a “modest rise” in inflation could happen over the medium term, prompting central banks in the region to raise policy rates “gradually.” For the Philippines, inflation is seen to settle at 4.2 percent in 2013, 3.8 percent next year before slowing down to 3.5 percent for both 2015 and 2016.
Policy rates will remain unchanged for the whole year, Tan said, but they will rise by 50 basis points in the early part of next year and stay there until 2016.
“We see continued appreciation of the peso. For this year, it will likely hit 37.50 (against the dollar), underpinned by continued inflows in this part of the world,” Tan said. Peso-dollar exchange rate is forecast to reach 35:$1 in 2014, 40:$1 in 2015 and 41:$1 in 2016.
“I would say, from my perspective, capital controls are quite unlikely… but stuff like macroprudential measures, things that could reduce volatility, deepen capital markets, are possible,” Tan said.