ADB to cut Philippines' 2005 growth forecast to below 5 percent

ADB to cut Philippines' 2005 growth forecast to below 5 percent

Eillen Ng, Associated Press, Manila, Philippines

The Asian Development Bank is likely to cut its growth forecast for the Philippines to below 5 percent for this year amid setbacks to its fiscal reforms and soaring oil prices, a senior official said on Wednesday.

But the country is not on the brink of a financial crisis despite the economic problems and political turmoil that include calls for President Gloria Macapagal Arroyo to step down, said the ADB's country director, Tom Crouch.

Philippine stocks have taken a beating while the peso has tumbled to a near-record low following the Supreme Court's decision Friday to temporarily halt an expansion in the value- added tax that was central to the government's fiscal reform efforts.

The suspension order, just hours after the VAT expansion went into effect, was the latest blow to Arroyo as she faces a clamor to step down over allegations she rigged last year's bitterly contested election.

"The Philippines is not in crisis, although it does face serious economic challenges," Crouch told The Associated Press.

He said the ADB in April predicted Philippines' economic growth would moderate to 5 percent for 2005 and 2006, but is likely to revise its projection down below 5 percent given the fresh developments.

Gross domestic product expanded 6.1 percent last year, the highest rate in 15 years. But Crouch noted first quarter growth this year already has slowed to 4.6 percent from 6.4 percent in the same period last year.

A slowdown in the world economy, softer demand for Philippines' exports, sustained higher global oil prices and rising international interest rates exacerbate the country's woes, he said.

"While the suspension of the e-VAT is a serious setback, it need not be totally debilitating," he said.

The government says the extra tax funds are needed to raise some 100 billion pesos (US$1.7 billion) a year in new revenues needed to pay off massive public debts and curb a swollen budget deficit.

The Supreme Court on Tuesday brought forward oral arguments on the case to July 14, from July 26. Credit rating agencies have warned that a prolonged suspension of the tax threatens the Philippines' sovereign credit ratings, which are already at junk levels.

Crouch declined to comment on the prospects of a regime change.

But he noted there had been "continuity and consistency" in economic plans following the ousters of late dictator Ferdinand Marcos in 1986 and President Joseph Estrada in 2001.

The two leaders were deposed by peaceful "people power" revolts. Arroyo, who succeeded Estrada, has refused to resign as the opposition has tried to muster support for another uprising to depose her.

"While each administration might adjust the priorities of programs and investments, the broad strategy for economic development remains fairly stable and does not move about violently as administrations change," Crouch said.

"Over the next few years, the economic challenges will remain the same - fiscal consolidation, improving the investment climate, and improving governance. The need for deeper and sustained reforms remains dominant."