Friends from the diplomatic community; representatives of the US government; ladies and gentlemen:
I must begin by thanking the Center for Strategic and International Studies for organizing this forum on current developments in the Philippines. This is an opportunity for us to present a better-rounded picture of where our country is and where we intend to go.
The Philippine economy is delivering the performance we anticipated, notwithstanding the political noise and a significant terrorist event in Mindanao. We have become an engine of growth for this part of the world.
For the second quarter of this year, our GDP grew by 6.5%. We expect even faster growth in the second half of this year. This performance is well on track in meeting the full-year target growth rate of 6.5% to 7.5%. Significantly, economic expansion was led by industry at 7.3% and agriculture at 6.3%. This is a departure from the earlier pattern where growth was led by the services sector.
The higher growth rate we have achieved is due to several factors.
Remittances from our foreign-based workers now account for about a tenth of GDP. That sustained inflow keeps consumption demand high.
We are also expecting more investments coming in as we modernize our infrastructure and reform our economic policies to spur business activity. Investment-led growth will make our domestic economy more inclusive and create quality jobs for our people. This will help bring down poverty incidence. Our entire economic strategy seeks to bring down poverty incidence from the current 21% to 14% by 2022.
The present government is pushing an ambitious infrastructure program that will increase roads, modernize our ports and airports and provide more mass transit for our cities. Called the Build, Build, Build program, we are seeking to match the infra investments of our neighbors such as Thailand and Singapore. Investments in infra have high multiplier effects and our construction program will have expansionary effects on the economy. By the second quarter of this year, government spending accelerated by 7.1% year-on-year. This indicates greater absorptive capacity and a political resolve to get things done.
The Philippines is looking to spend about 20 Billion USD per year through the medium term to build the urgently needed infra. The escalated spending will be funded by means of official development assistance packages as well as by expanded revenues expected from the comprehensive tax reform package.
The tax reform package will align our tax rates and policies with the rest of the region. We are hopeful the Philippine Congress will pass this reform package into law. The reforms enjoy the support of the business community, professional economists and a large number of private groups wishing to see a simpler and more efficient tax system. We aim to achieve a tax effort closer to the regional norm of 15% of GDP.
With the increased revenues from both administrative and tax policy reforms, we aim to keep our deficit to 3% of GDP. That will allow us to grow our economy more rapidly without inviting a spike in inflation. The fiscal discipline we maintained over the past few years enabled the country to achieve investment grade credit ratings. Those ratings enable us to borrow at significantly lower rates. We intend to continue deserving those credit ratings.
The Philippines benefits as well from a benign interest rate environment. That environment encouraged a property development boom as well as increased business activity. Over the coming years, we expect that benign interest environment to persist.
The benign interest rate environment enabled us to work down our public debt to more than manageable levels. This produced a virtuous cycle. The lighter debt load won us better credit ratings that in turn helped us keep interest rates low.
Notwithstanding increased spending for the infra program and expanded social services, we are forecasting the inflation rate at between 2% and 4% through the medium term. We are limiting the public sector deficit to 3% of GDP. As a matter of policy, we are maintaining an 80% to 20% ratio in borrowing favoring meeting our financing needs through domestic borrowing. This will lessen the exchange risks as we pursue an expansionary economic strategy.
Over the past few years, our GDP grew faster than our debt accumulation. Prudence dictates that we strive to maintain this trend. Fiscal stability is key to the sustainability of our economic expansion. We are further modernizing our capital markets to enable the consolidation of capital to support long-term growth.
We have significantly moved up the global rankings for the ease of doing business. We intend to build on these gains by working harder at reducing red tape, curtailing corrupt practices and limiting our negative list for investments. We have every interest in simplifying procedures for business. New investments and more business activities are what will liberate our people from poverty.
One of the least mentioned advantages of the Philippines is that we have a very young and talented work force. This is an asset in a region with aging workforces. Over the next few years, we expect to hit a demographic sweet spot. The large number of young people entering the workforce is, at the same instance, a challenge for the economy. We must expand quickly enough and draw larger volumes of investments to create the jobs the new entrants to the workforce expect.
We are investing heavily in training young Filipinos to be more competitive in the new global economy. We understand that this young workforce will be our economy’s comparative advantage long into the future. That young and talented workforce produces complementarities with the other economies of the region. If we fail in achieving our economic targets, we will have a disillusioned young generation. If we succeed, the younger profile of our work force will be a tremendous asset — considering the rapidly aging populations in the advanced economies of our region.
The larger fiscal space we now enjoy will mean nothing if we do not improve our bureaucracy’s capacity to efficiently execute policy. In the past, absorptive capacity was a problem. It is less so now, with a more efficient, less corrupt and highly motivated bureaucracy.
A more efficient bureaucracy will improve the ease of doing business in the country. We understand there is still much work to be done in this area. We will relentlessly pursue both administrative reforms across the board and the reform of policies restrictive to business initiatives.
We appreciate the support extended by the US government intending to help modernize our governance, improve policy formulation across the board and strengthen the rule of law in our country. The support likewise covers winning peace and progress for Mindanao, facilitating trade and modernizing our agriculture. With the help of generous development assistance from the US, we have accomplished much. We hope improvements in our governance and a benevolent conjuncture of factors favoring stronger growth will encourage private investments from the US to take a much closer look at our economic prospects.
In closing, let me say that the partnership between the Philippines and the US can only grow stronger in the coming period. This is a partnership tested by time and made more enduring by the shared values we hold.
We can only promise to work harder to achieve a peaceful and prosperous nation our people deserve. We are confident that, with the support of our friends, great things will be achieved over the next few years.
We are optimistic and we are committed. We are confident we have the correct strategy and moving in the right direction. We will continue to rely on your support in this grand effort to reduce poverty, build strong institutions and properly care for the most vulnerable among our people.
Thank you and good day.