Abstract

In the third quarter of 2014 (Q3), the Philippine economy expanded by 5.3 percent its slowest pace in 11 quarters. Growth slowed down due to the contraction of government spending on the demand side and agricultural production on the supply side. The services sector the main engine of growth also slowed to its lowest level in 12 quarters. For Q3 2014 and for the first 3 quarters of 2014, Philippine growth is about average when compared to the major economies in the East Asia region. Capital outflows resulted in a full-year balance of payments deficit of about USD 3.4 billion, the first in a decade. However, the current account remains in strong surplus, supported by robust remittances, while international reserves continue to be at comfortable levels at more than 10 months of imports. Inflation started to moderate, with positive impact on both households and businesses while government spending contracted significantly in Q3 and constituted a further drag on growth. Sustaining government spending in the near-term will require significant improvements in budget planning and execution as the current 28-year old system, already at capacity, is hard pressed to support higher spending. Going forward, the Philippines needs to accelerate reforms that can translate higher growth into more inclusive growth the type that creates more and better jobs so that poverty can be reduced massively and prosperity shared by more people. Overall, the country has an investment gap (both physical and human capital) of around 6.8 percent of GDP as of 2014. The document outlines this investment gap.