MANILA, PHILIPPINES - PHILIPPINE economic growth will fall sharply this year due to an overvalued peso and businesses who fail to re-invest their profits, a Manila-based think-tank said.

After gross domestic product (GDP) struck a 31-year high with growth of 7.3 per cent in 2007 and inflation at a 20-year low of 2.8 per cent, the Philippine Institute of Development Studies said on Wednesday growth would fall.

It forecast GDP growth this year should drop to 5.9 per cent with inflation rising up to 5.2 per cent.

'That's a sign of trouble ahead,' he said.

'There indeed will be a slowdown,' though growth 'will still be a respectable 5.9 per cent in 2008', he told a public forum in Manila.

The forecast was below the official GDP growth target of 6.3-7.0 per cent.

Services and agriculture will continue to be the main drivers, while manufacturing growth would be at an even lower 3.0 per cent from 3.3 per cent last year, Mr Yap said.

He said inflation 'will likely breach the (official) target of 4.0 to 5.0 per cent. Our forecast is 4.8 to 5.2 per cent, or at the very least on the high side of the (government) target'.

'The peso is overvalued by roughly nine to 10 per cent,' he said. 'Which is the main thing constraining our manufacturing sector.' Investment rates plunged to 13.8 per cent of GDP in 2006 from 21.2 percent in 2000, he said, citing government data.

Imports of durable equipment for manufacturing fell to 46 percent of GDP in the nine months to September 2007 compared with the 63 per cent of GDP measured during the Asian financial crisis in 1997.

'Traditional elitist conglomerates' were not investing profits and lowering the cost of doing business 'because they are earning profits anyway', Mr Yap said. -- AFP