MANILA, November 10, 2004 (STAR) Despite the current poor state of the economy and especially its fiscal position, which must be a number one priority for action, the World Bank said yesterday it remains "optimistic" about the country’s health.

World Bank vice president for East Asia and the Pacific, Jemal Kassum, said the economy was one of the weakest in East Asia but at the same time he was "encouraged" by the government’s program to address the fiscal crisis.

"I believe the fiscal reforms the government of President Arroyo intends to implement are a step in the right direction," Kassum told a media briefing on the release of the World Bank’s East Asia Update report.

"Fiscal reform must be the number one priority of the government if it is to address the difficult fiscal challenges facing the country today.

"There are no easy answers and the challenge has to be met now," he said adding: "I am optimistic about the Philippines."

He said strong political will and support from various sectors of the community, not only the government, will be critical if the fiscal burden is to be reduced.

Non-financial public sector debt now exceeds 100 percent of gross domestic product (GDP) and contingent liabilities are also significant, the World Bank report said.

"In the light of a less favorable and uncertain regional outlook, a larger upfront fiscal adjustment becomes more imperative and urgent," Kassum said.

"The larger the upfront fiscal adjustment, the higher the probability that public debt will be sustainable and the country can enter a virtuous spiral of fiscal recovery and growth," he said.

In a meeting with President Arroyo on Monday he "reconfirmed the Bank’s continued partnership with the government."

The Philippine economy grew at a better than expected 6.3 percent during the first half of 2004 but there are growing concerns about its sustainability especially in the light of higher oil prices.

Joachim von Amsberg, the World Bank’s country director for the Philippines, told the briefing that fiscal reform was "vital" for the recovery process.

He said private investment was below its potential and that despite "the country’s excellent assets in terms of its educated population and rich natural resources," foreign direct investment was in decline.

Von Amsberg said Philippines growth over the past 20 years has been lower than for most of its neighbors while its competitiveness ranking, according to the World Economic Forum, has slipped from 35 in 2000 to 52 in 2004.

"One way of laying the foundations for a more competitive Philippines economy is the implementation of fiscal reform measures," he said.

"This will have a significant impact on investor confidence. At present fiscal problems are undermining corporate decisions on investment and hiring plans.

"Concerns about fiscal sustainability and macroeconomic risks have led to a decline in business confidence in the Philippines."

He said corruption, lack of infrastructure and regulatory uncertainty also weighed heavily on business confidence.

"The government will need to make some pretty tough and painful decisions if the Philippines is to meet its full potential," he said.

"If the country continues to make efforts to distinguish itself from its neighbours, then it can be successful in competing for investments, financing and markets.

"It is vital for the Philippines to develop a reputation based on a stable political and economic environment and an efficient investment regime."

Reported by: Sol Jose Vanzi

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