MANILA, Philippines - The Asian Development Bank (ADB) has raised its growth forecast for the Philippines this year to 3.8% from the previous 3.3%, citing strong private consumption, rebound in exports and investments, and election-related spending.

But the latest growth projection was "still below potential" and under the 5.5% recorded in the five years until 2008, when the economy started to take a heavy blow from the global crisis, ADB said in its Asian Development Outlook 2010 report.

"The outlook assumes that there is a smooth political transition in 2010 following presidential and legislative elections scheduled for May, and that the new government pursues credible economic and fiscal programs," it said.

ADB said private consumption will likely remain the main driver of Philippine economic growth in the next 2 years, underpinned by continued growth in remittances, a firmer labor market, and stronger consumer confidence.

It noted that election-related spending will also provide a boost until May.

The country's exports, meanwhile, are seen to grow in line with the global recovery while investments are forecast to rebound from last year’s low levels now that the external and domestic outlooks have improved.

Services will benefit from stronger growth in private consumption as well as election-related spending, while manufacturing is projected to recover gradually in tandem with the rise in external demand, particularly for electronic products, the ADB further noted.

By 2011, the multilateral lender estimates Philippine economic growth to accelerate to 4.6%, but it said this is subject to more uncertainty, "since the new administration’s economic and fiscal policies will have an important bearing on the momentum of growth."

Fiscal position

After the presidential elections in May, ADB said one of the challenges for the next government will be to strengthen its fiscal position.

"Fiscal policy will likely be less stimulative in 2010, given budget constraints and plans by the current administration to trim the fiscal deficit to 3.5% of gross domestic product (GDP)," the ADB said.

It said spending on social services is budgeted to rise, but the amount set aside for infrastructure is lower than last year.

On the revenue side, the multilateral lender said resources have been severely constrained by weak collections, especially since more tax exemptions were approved early 2010, and additional tax breaks are being proposed.

The Philippines saw its tax-to-GDP ratio decline to 12.8% in 2009, lower than most of its neighbors, the ADB said.