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Hard-earned savings from foreign workers and government spending boosted growth in the Philippines to a three-decade high last year, but the surge was lopsided and could be short-lived, analysts say.
As inflation soars this year, consumption of non-food items will shrink and growth will slow.
Analysts say that the government needs long-term strategies to overhaul the country's weak underlying fundamentals if it wants to keep growth high and sustainable.
"The underlying investment climate has not been particularly strong," said Sin Beng Ong, an economist at JPMorgan Chase. "What we have is growth that is lopsided, biased towards consumption, and with not enough going to investment. And that is going to be a challenge for the government."
In the first quarter, gross domestic product (GDP) grew only an annual 5.2 per cent from 7.2 per cent in all of 2007 and the outlook for the rest of the year suggests the country will sink back to a growth trend of about 5 per cent.
The Philippines' 7.2 per cent GDP growth in 2007 was a 31-year high, and came while inflation remained at a two-decade low.
Private consumption, boosted by $14.45 billion in remittances from overseas Filipinos, surged as inflation remained low, leaving people with more discretionary income. Public consumption also spiralled because it was an election year.
"Even though it was seven per cent growth, it didn't benefit the economy all that much," said Tom Byrne, senior vice-president at Moody's Investor Service, referring to the dominance of consumption.
Still, he said, there was some investment in infrastructure as the government paid lower interest on debt because of the strong peso and thus had more money to spend.
"So for the first time in something like five years, investment actually grew as a share of GDP," Byrne said.
So far this year, the government has promised to keep up its infrastructure building programme, with expenditure accelerating in the second and third quarters after a tepid first quarter.
It is also providing cash handouts to the poor to alleviate inflation and consequently has jettisoned the goal of balancing the budget this year and pushed that back to 2010.
Fiscal headroom
"The trend of improvement in fiscal headroom for such spending on infrastructure, or social welfare, has certainly shrunk," said Byrne.
But he added: "Right now, it won't be a tremendous burden on the budget. A small budget deficit of between 1-2 per cent of GDP, that's sustainable."
Analysts are looking to government spending on roads, ports and power to boost economic activity in the short term and provide a more attractive investment climate in the long term.
"I think it's the major story we are looking at," said Jonathan Ravelas, chief market strategist for Banco de Oro, the second-largest bank in the country.
"We feel because of the government infrastructure programme and the overseas Filipino workers, we should be able to sustain above five per cent growth."
The question is whether that is enough to make a lasting dent in poverty. At least 30 per cent of the Philippines' 89 million people live below a government-defined poverty line of $150 a month per family of five and economists say sustained high growth is needed to bring that number down.
"It does need seven-plus per cent growth to lift itself out of poverty," said Steve Rood, country representative for The Asia Foundation.
"The problem is achieving it in the face of the different bottlenecks, both social and physical."
"In order to address investment bottlenecks, one needs adequate government resources but you also need a stable policy environment so that private sector alternatives can be explored."
"There is progress in providing physical infrastructure, but education is moving somewhat more slowly," he said.
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