It's Looking Good for the Philippines

By Jeanette S. Laurente  

A slow global economic recovery is under way, but the downturn induced by the September 11 attacks is far from over. The world’s top economies have managed to regain strength, and are once again on a slow-paced rebound, in spite of major political uncertainties in the Middle East and in other parts of the world.

    In the US, consumer spending, which constitutes the biggest share in the country’s Gross Domestic Product (GDP) – the value of all goods and services produced by the domestic economy and the most commonly-used indicator for economic growth – has resurged. The US manufacturing sector, the most affected sector in last year’s mild recession, also grew this year. The recession-plagued Japanese economy is beginning to show signs of stability, driven in part by recovery in its exports industry. Its industrial output is expected to increase, although minimally. Preliminary estimates show GDP growth in the Euro zone economies (European countries that use the euro as currency), which had earlier underperformed after their unification this year. Latin American economies, with the exception of inflation-stricken Argentina, also posted positive, albeit, sluggish growth. Brazil, the largest Latin American economy, announced a trade surplus in May due to a weak currency, making its exports more competitive in the foreign markets. The Asian economies also grew, but certainly slower compared to pre-1997 crisis.

    But while these economies show signs of recovery, they are still highly unstable.  Major currencies, most notably the US dollar, continue to fluctuate, investors are not keen on investing and stock markets are highly volatile. And like a contagious disease, these economies’ instability negatively impacts on the economies of developing countries – which are weaker and depend on them for support.  Argentina, for example, is still reeling from its recent peso devaluation, which has resulted in price increases of up to 70 percent and massive retrenchment of workers.

    China, perhaps the only country least affected by last year’s slowdown, is still bent on maintaining its high growth rate this year. China’s decision to join the World Trade Organization (WTO) in December 2001 contributed to high consumer confidence that is keeping the so-called giant market alive.

    Global growth forecasts are 2.8 percent this year and 4 percent next year – well below the targets before the September 11 attacks. Economists are keen to note that since the global economy is fragile, any uncertainty can halt its recovery. And for as long as terrorist issues and political conflicts in the Middle East, India and Pakistan remain unresolved, the global economy’s growth cannot accelerate any further.

The Philippines: Positive Growth

    The Philippines is quite fortunate to be only moderately affected by the global recession last year.  Among the East-Asian economies, the Philippines was the second fastest growing with its 3.2 percent GDP. It further grew in the first quarter this year, based on data released by the National Statistical Coordination Board.  Despite the turmoil in Mindanao and the peace and order situation in the country, GDP increased by 3.8 percent in the first quarter compared to 2.9 percent in the same period last year.

       The three major economic activities – agriculture, fishery and forestry; industry; and services – all posted positive growths in the first quarter. Agriculture, fishery and forestry grew by 4.4 percent compared to only 3 percent last year, while the aggregate production of crops especially rice, livestock, fish and poultry greatly improved.  The government credits the strong performance of this sector to favorable weather conditions and the Arroyo administration’s agricultural modernization program.

    Meanwhile, the industry sector posted a 1.9 percent growth – a vast improvement over the 0.6 percent growth last year – with its two main sub-sectors, mining and quarrying, and construction, on an upswing following last year’s contraction. The services sector, on the other hand, posted a 0.2 percent growth, for a 4.8 percent total growth in the first quarter, compared to 4.6 percent in the same period last year. The slight growth is due to resurgence in real estate and private and government services.  The other sub-sectors, namely, transportation, communications and trade posted negative growths.

    The first quarter GDP is well within the government’s forecast of 3.8 percent to 4.3 percent. The growth, however, would have been higher if not for a decrease in demand for locally-assembled semiconductors (that are exported) and in personal consumption expenditure. The first quarter decrease in personal spending is a result of a decline in food expenditure and a sharp fall in fuel, light and water expenditures. The latter denotes that households may be limiting their electricity consumption to lessen payments for the purchased power adjustment (PPA).

    A higher GDP is expected in the second quarter as preliminary data from April to May indicate an increase in both consumer spending and industrial output. With increased demand for exports from the country’s leading trading partners – the US, Japan and Taiwan – in April, the GDP is expected to grow further.  With the first quarter results out and higher growth expectations in the next quarters, the government is confident that it can reach the year’s GDP target of 4 to 4.5 percent.

    A higher second quarter GDP, with a projected increase in investments, is expected to make a dent on unemployment, reported at 13.9 percent in April. The unemployment rate is seasonally highest in April when new graduates join the ranks of the unemployed.

Strong Peso, Low Inflation

    Meanwhile, an increase in exports coupled with a weak dollar in the foreign exchange market will help strengthen the peso. A strong peso in the market means cheaper imports and lower payments for foreign currency debts. At present, the peso-dollar exchange rate hovers at around P50 to $1. The government hopes to maintain an exchange rate of P50 to P51 to a $1 for the year.

    Inflation, or the periodic increase in the price of goods and services, averaged 3.6 percent in May, down from last year’s overall average of 6.1 percent.  Inflation for fuel, light and water expenditure was highest at 12.1 percent last year, but this May, however, it went down to 10.1 percent despite a hike in oil prices, which was absorbed by a stronger peso. The inflation rate has been at a level below the government’s target since December 2001. The government forecasts an inflation rate of 4.5 percent to 5.5 percent for the year.

    Treasury bill (T-bill) rates – the benchmark for interest rates used by banks – were down in the first quarter at a historic-low of 4.38 percent. Interest rates determine the cost of borrowing and a high cost discourages firms from borrowing from banks, resulting in fewer investments. The low T-bill rates in the first quarter significantly added to the government’s revenues, helping offset government spending and limit this year’s budget deficit to P130 billion. T-bill rates, however, climbed to 4.78 percent in June and is expected climb higher, following the release of the January-April budget deficit status. The government targets a T-bill rate of 7 to 8 percent for the year.

The Budget Deficit

As of April this year, the country’s budget deficit reached P82.96 billion, overshooting the projected ceiling for April by 6 percent. This figure already translates to 64 percent of this year’s P130 billion budget deficit ceiling.  The deficit was caused by a weak revenue collection and overshoot in government spending. From January to April, the three key revenue-generating agencies – the Bureau of Internal Revenue (BIR), the Bureau of Customs and the Bureau of Treasury – posted a total revenue collection of only P180.73 billion, which was barely 60 percent of the first semester target of P303.48 billion. The BIR gave the weakest performance among the three agencies.  It underperformed in the collection of taxes, due mainly to the non-implementation of tax reforms and other economic factors such as weakness in some sectors of the economy and a decline in interest rates. Customs was no better, but it managed to increase its collection by 1.2 percent compared to its performance last year. The Bureau of Treasury was the only agency that made substantial gains, having increased its collection by 14 percent from January to April this year.    

Meanwhile, January to April figures placed government spending way beyond a six-month budget of P381.74 billion. As of April, around P264 billion or 69 percent of the budget had already been spent. A substantial part of the budget went into the salaries of government employees.

Despite suggestions for the government to induce spending to spur economic activity, the government is firmly committed to stick to its 2002 government expenditure budget of P754 billion and deficit of P130 billion. The government is bent on doing this in order to lessen the P2.5 trillion domestic debt as of March this year. In order to achieve this, the government is likely to implement expenditure cuts. Unfortunately, expenditure cuts will mean spending less for the upkeep and improvement of the armed forces, infrastructure, education and other public services, all of which are necessary to induce and support overall economic growth.  

Stable Jobs and Prices 

Macroeconomic prospects for the Philippine economy are encouraging and sustained growth is feasible. But the real challenge is to get this growth to go down to the lower reaches of the economy. The Arroyo administration has prioritized improvements in the areas of employment and the provision of basic needs and services – two areas in which the poor need the most assistance. Therefore, the way to fight poverty is by creating new jobs and keeping prices stable.

More than 25 million Filipinos – all living below the poverty threshold of P13,823 – are hoping to feel the economic growth as projected in the papers and experience the fulfillment of the administration’s promises. But they need to see concrete results – a stable job for the unemployed members of the family, just wages, cheaper food prices, among others – at the soonest possible time.

This and other updates are found in the July 2002 issue of the Intersect.  Copies of this issue are still available.

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