MANILA, Philippines - The World Bank on Thursday raised to 4.4% its growth forecast for the Philippines, higher than its original forecast of 3.5%.

For 2011 and 2012, the bank is forecasting a 4% GDP growth for the country.  

The World Bank has forecast global GDP in 2010 to rise by 3.1%, and by 3.3% in 2011. It said global growth will strengthen between 3.2% and 3.6% in 2012, reversing the 2.1% decline in 2009.

"Even as the world economic recovery continues to advance, it faces fresh headwinds on the road to sustainable medium term growth," the World Bank cautioned in its latest Global Economic Prospects 2010.

It said that developing economies are expected to grow between 5.9% and 6.1% each year from 2010-2012.

High-income countries, however, are projected to grow by between 2% and 2.3% in 2010 — not enough to undo the 3.3% contraction in 2009. It has forecast high-income nations' economies to expand by between 1.9% and 2.4% in 2011.

The World Bank’s projections assume that efforts by the International Monetary Fund and European institutions will stave off a default or major European sovereign debt restructuring.

But even so, it said developing countries with close trade and financial ties to highly-indebted, high-income countries may feel serious ripple effects.

Closer to home, World Bank chief economist in the Philippines Eric LeBorgne said the country still lags behind its neighbors in the region.

"It's not a new phenomenon, it's actually a structural phenomenon, it's been decades that the Philippines has been growing less rapidly than some of the more best performing countries in the region."

LeBorgne said that while the country's surprise first quarter 7.3% growth was "amazing, "Singapore, India and Thailand have been growing at a faster pace in recent years.

"If you look at some of these countries, they have been growing at faster rates. The Philippines has been growing less rapidly in boom time, but in small amounts in downtime. So during the global recession, the Philippines outperformed, if you want, in a region with a negative contraction."

LeBorgne said the Philippines was among the few countries such as Indonesia and China, which did not experience a recession.

"In that sense, you have shallower boom and bust in the Philippines, and the main reason for that is the large share of the economy are remittances which we know are less volatile than exports and imports which are major,larger sources of the economies of Indonesia, Thailand and Malaysia."

LeBorgne said the World Bank's revised GDP forecast for the Philippines was partly due to the first quarter performance, but he said a lot depends on remittances from Filipinos working abroad. Money sent home by millions of overseas Filipino workers fuel consumption.

Risks

The European debt crisis is both a downside and upside for developing countries like the Philippines, said LeBorgne.

He said that if the debt woes in Europe linger, it can stall global recovery and growth. This would force investors to  flock to safer investment havens.

Developing countries in Asia and the Pacific, which the World Bank sees as leading recovery, will benefit from a capital flight.

"They will move to Asia because Asia has better growth prospects. That could mean a lot of capital inflows into the country."

However, he said that a strong appreciation of the local currency or the Philippine peso "would mean that the peso value of remittances could be significantly negative. So that would drag down consumption."

A rising peso would also have a negative impact on exports, said LeBorgne, especially furniture and high-value crops.

"An appreciation of the peso could have significant impact on exports of non-electronic and non-semiconductors, that would affect agriculrture, this could have a lot of impact on employment."

New government

While the 4.4% GDP forecast for the Philippines is "evenly balanced," the country's potential for higher growth is there, especially as a new administration is coming in, said the World Bank.

Congress on Wednesday, proclaimed Benigno Aquino III as the 15th president of the country.

The highly unpopular administration of outgoing President Gloria Arroyo which has been marked by scandals and graft and corruption charges, was pointed out repeatedly by economists, as a reason for the significant decline in private investments in recent years.

"Maybe with a new administration with a stronger focus on governance, there could be a revelation of the investment climate, and that could be a strong added boost to growth," said Leborgne.

Aquino in his first news conference on Wednesday as President, said he will prioritize the country's ballooning budget deficit and will only make new taxes a last option. He also vowed to go after tax evaders and corrupt tax collection agencies officials.