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Key Economic Data 
  2003 2002 2001 Ranking(2003)
Millions of US $ 80,574 77,076 71,400 43
GNI per capita
 US $ 1,080 1,020 1,050 135
Ranking is given out of 208 nations - (data from the World Bank)

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Philippine peso (PHP) 



Update No: 013 - (18/02/04)

In 2004, the Philippines economy returned its best performance in 15 years-gross domestic product expanded by 6.1 per cent. This expansion exceeded the government's target which was in the range of 4.9-5.8 per cent and was broad-based. Economic recovery was sustained across agriculture, industry and the services sector. 
Thanks in part to a good local performance (which in fact reflected the strength of the global economy in 2004) the government ended the year with higher than expected revenue collections and a lower than expected budget deficit. Fiscal reform appears to be on track. So far the government has had it easy! Now with tougher economic times ahead (but as we have argued elsewhere, still manageable) the government of President Macapagal-Arroyo will have to work that much harder to stay on the intended growth path and achieve the stated goal of eliminating the deficit and restoring economic health to the Philippines on or before her term expires in 2010. 

A pleasing end to 2004
When viewed against other recent years, the Philippines economy performed well last year. Agricultural output rose by 4.9 per cent overall but was reduced in the final two months of the year by exceptionally strong typhoons which hit palay (rice), corn and vegetable production in the final quarter. The industry and services sectors grew by 5.3 per cent and 7.3 per cent respectively on the back of strong domestic and foreign demand. Domestic consumer spending remains strong benefiting from strong growth in overseas remittances which officially reached US$7.7 billion to end November 2004 and unofficially was possibly twice that amount (since much of the money flowing into the country flows through informal networks rather than the formal banking system). Remittances will likely be seen to have grown by around 11 per cent last year and to have contributed around 10 per cent of domestic economic production.
Export growth also appears to have been strong and bolstered by a pleasing result in the final quarter. According to a January 31st statement by the National Statistical Coordination Board, exports of goods and services grew by 14 per cent in November 2004 but slackened again in December and ended the year with a 9.3 per cent growth rate overall. This was a tad short of the target of 10 per cent. Given the fact that 2004 was an exceptional year for global trade growth, this result is something of a disappointment. Electronics exports accounted for 66 per cent of total manufactured exports with apparel and clothing in second place at around 5 per cent of the total. With more and more electronics companies centring their manufacturing in North Asia, and especially China, the Philippines is in urgent need of export diversification if foreign trade is to remain a significant driver of economic growth.
Within the service sector, business process outsourcing services (broadly defined) is rapidly expanding and providing employment for many of the country's English speaking graduates. Call centre seats have increased from a mere 1,000 seats in 2000 to 20,000 seats in 2003, 35,000 seats in 2004 and with the number expecting to increase to at least 50,000 in 2005. There are now 66 call centres in the country and 14 business process outsourcing companies. Unfortunately however, the contribution of BPO services to fixed capital investment is minimal. Nevertheless provided the Philippines can sustain a level of suitable graduates for entry into the industry, the prospects for further employment generation appear bright since studies suggest that the Philippines is becoming more competitive than rival India in this sector of the economy.
Tourist arrivals represent more good news for government. International tourists last year rose by 23.6 per cent over the previous year to a total of 1.8 million visitor arrivals. The government has estimated that tourists contributed a total of $2 billion to the economy. Tourism growth is especially important since it often provides jobs in rural areas and for less educated people than in the white collar areas of the economy.
Foreign direct investment continues to lag although there are signs of a revival of interest in the Philippines especially with the opening of the mining sector. Of course, portfolio investments are a different story with the local bourse being among the best performers within Asia in recent times and with potential to grow further. However, with only around 30 companies included within the main stock index, the absorptive capacity of the market remains small. Nevertheless it is pleasing to note that foreign institutional investors are again becoming interested in the Philippines with a number of the emerging market fund managers placing a small portion of their investment portfolios in the local market. 

Forecasts for 2005
Most analysts are expecting the local economy to perform less well in 2005 than in 2004. The Economist Intelligence Unit has predicted a 4.5 per cent rate of expansion for 2005 slackening to 4.2 per cent in 2006. We expect that these estimates may be revised upwards with growth for this year coming in the range of 5.0-5.5 per cent. This would still be lower than the latest forecast of the Philippines government.
Based on the latest assessments of the National Economic Development Authority's (NEDA), the Philippine economy is forecast to grow within the range 5.3 -6.3 per cent this year, with construction projects and business process outsourcing sectors likely to grow the fastest. (About PhP80 billion is estimated to be invested for this year's major infrastructure projects such as Northrail, Subic-Clark-Tarlac road, South Luzon Expressway rehabilitation project, Subic port, and airports of Iloilo, Bacolod, and Cagayan de Oro.) 
The industry sector will likely benefit from the flow-on effects from construction activity and is forecast to grow by 7.1 per cent this year. A growth rate of 6.6 per cent has been predicted for the services sector led by demand for call centres and BPO activity.
In the area of foreign trade, the National Economic Development Authority (NEDA) is targeting an export growth of 8 per cent in 2005 down slightly from the growth rate for 2004 due largely to the effects of a weaker global economy and specifically the downward trend in demand for electronic components. Nonetheless, Economic Planning Secretary Mr. Romulo Neri maintains that the country's export driver would still be electronics, followed by food and automotive parts. Garments and apparel did not figure in Mr. Neri's statement in spite of the fact that these were the number 2 export items last year.
Mr. Neri estimates that the agricultural sector will grow by 4.2 per cent in 2005. Again this is lower than the 5.1 per cent growth posted last year by this sector. The lower growth projection is due to the El Niño weather phenomenon that results in lower rainfall for much of the country. In fact drought conditions are already affecting some areas of Mindanao. Nevertheless the government has vowed to continue providing support to increase productivity of farmlands. 
The University of Asia & the Pacific Centre for Food and Agri Business has placed an even lower growth rate for the agricultural sector this year, at between 2.5-3.5 per cent. The UA&P Centre is expecting a decrease in agricultural growth due to the limited government budget for agriculture, the high cost of farm inputs, and the impending El Niño dry spell. Specifically, the UA&P Centre anticipates that because of the combined effects of these factors, there will be a reduction in rice, corn, sugar and commercial fishery outputs this year. The Centre has suggested that the government should refrain from making changes in the Department of Agriculture leadership since it will hamper the implementation of key programmes. The main drivers in increased agricultural production, according to the UA&P Centre, would be seaweed, corn and the coconut (copra) industries. 
While the overall growth projections for this year have been lowered from last year's performance targets, the target range for inflation has been raised to a level of between 4.5-5.5 per cent using the 2000 consumer price index. This is up by 0.5 per cent from the original inflation target range of 4-5 per cent. The National Statistics Office has reported that the full-year inflation rate in 2004 was 5.5 per cent using the 1994-based CPI series. This year, the NSO will cease to use the 1994 CPI and the 2000 CPI-series will be used instead. 

A lower than expected budget deficit in 2004
The official (provisional) figure released by the Department of Finance on the national government's full-year budget deficit in 2004 placed the final deficit at PhP186.1 billion (around US$3.4 billion). This was lower by PhP11.7 billion than the target of PhP197.8 billion. The 2004 deficit figure, if sustained, will be equivalent to 3.9 per cent of GDP. Last year, total government expenditure amounted to PhP884.4 billion (US$16.1 billion) against revenue of PhP698.3 billion (US$12.7 billion). Of the total revenue amount, the Bureau of Internal Revenue (BIR) contributed 67 per cent (or PhP470 billion) while 17 per cent (PhP122 billion) came from the Bureau of Customs. The remainder was made up from a number of other government agencies. 
Given the improved fiscal data for 2004, Finance secretary Juanita Amatong has expressed optimism that the Philippines would be able to achieve a zero budget deficit by 2009, a year ahead of the 2010 schedule. Under the Philippine Medium Term Development Plan, a PhP14 billion yearly reduction in the projected budget gap will be made until the zero budget deficit is achieved in 2010. The country has been experiencing budget deficits for more than two decades, except in the period 1994-997 when it recorded surpluses. 
The BIR, which collects around two-thirds of total government revenue, actually missed its target last year according to the preliminary data. Actual collections were 1.3 per cent below target. Nevertheless, the Bureau has revised upwards its projected tax revenues for 2005 and is expecting a 17 per cent rise in revenue collections. If achieved, this would bring 2005 income to PhP550 billion. How will it do this? Well aside from the new revenue-generating measures now being debated in Congress, it will provide incentives to those companies and individuals that correctly declare their taxes by exempting from audit any taxpayer who increases their tax payments by 20 per cent or more.
Yet, while the result encourages optimism, these predictions relating to revenue-generation could yet be over-optimistic. The better than expected performance last year was made possible because the economy put in its best performance in 15 years because of external factors. This situation is unlikely to be repeated this year. This means that it is imperative that the government improves both its collection efficiency as well as ensuring Congress stays the course on the passage of new revenue measures that will give the government the resources and the international investment community the confidence to move forward.

A budget for 2005 that emphasises infrastructure
The government has submitted an austerity budget to Congress which will hopefully be passed before end February. In its budget for the coming year, the government will allocate PhP1.64 trillion (US$30 billion) over the next six years to implement the pro-poor 10-point agenda of President Gloria Macapagal Arroyo. The financial requirements for this programme will be sourced from expected revenues from new tax measures, savings from the austerity programme, and public and private investments, particularly in the mining industry.
Of the PhP1.64 trillion, the biggest portion, 39.12 per cent or PhP643 billion, would go to electrification and provision for potable water to all barangays (local government units).
Improvements to the nationwide transportation network has been allocated PhP295.7 billion through the strengthening of the east, central, and western nautical highway and greater information sharing among government branches. Another PhP128.3 billion has been allocated to transfer national agencies to other regions as part of the plan to decongest Metro Manila and to the construction of additional transportation links between Metro Manila and outlying provinces to hasten traffic. Thus, a total of PhP424 billion or about 25.8 per cent of the budget programme has been allocated for the improvement of the transportation system and government facilities. 
About PhP312.9 billion or the equivalent of a further 19 per cent will be allocated to fund the President's commitment to create 10 million new jobs. This will be done by increasing the loans available to three million small and medium enterprises and for the development of two million hectares of land for agribusiness. 
The education sector will receive an allocation PhP140.9 billion, or 8.57 per cent, for the construction of at least 6,000 classrooms annually, provision of books and computers, and financial assistance to poor students. 
Meanwhile, the continuing development of the former US military bases Subic Bay Freeport in Olongapo City and Clark Field in Angeles City as a as a modern regional logistics hubs will require PhP84.2 billion, or 5.12 per cent of the total budget.
The remaining balance of PhP38.7 billion will be apportioned to the following: PhP17.9 billion, or 1.09 per cent, towards the balance the national budget; PhP14.9 billion earmarked for various projects in keeping with the peace process such as rehabilitation and reintegration of former rebels, implementation of a Madrasa (Islamic school) program; and finally, PhP5.9 billion for the automation of elections.
With the new infrastructural development programmes, the government is hoping that further private investment will be encouraged thereby paving the way for further job creation and expansion measures that will accelerate further economic growth and reduce unemployment levels. The Catch-22 of course is the lack of a population control policy in this deeply Catholic country which means that the Philippines must achieve better than average results just in order to keep within Asian norms of growth. Yes, the country is likely to perform better than it has in the recent past, but whether this will be sufficient to make a significant inroad into the poverty and unemployment problems remains to be seen.

Market Reactions to recent developments
The 10-point agenda of President Arroyo has been criticised by the opposition and by other observers as doing too little to tackle fundamental problems facing the Philippines as a society. Yet with the formal opposition remaining in disarray, President Arroyo faces no real challenge to her presidency. While the administration may be far from perfect, it is certainly putting the Philippines on the right track and no one can doubt the seriousness with which the government is working.
In spite of a sovereign ratings downgrade by International rating agency Standard & Poor's, the market appears to have shrugged off the downgrade and is prepared to give the government the benefit of the doubt. S&P took the government somewhat by surprise in January when it lowered the country's long-term foreign currency sovereign debt rating to "BB minus" from "BB". At the same time it amended the long-term local currency sovereign credit rating to "BB plus" from "BBB minus". S&P also amended the short term local currency debt rating to "B" from "A-3" and affirmed the country's short-term "B" foreign currency sovereign credit rating and gave a "stable" outlook mark on the country's long-term credit outlook.
The financially burdened Philippine government will have to pay additional PhP30 billion in debt payments due to lowering of the country's credit rating unless S&P takes a fresh look at the data. 
The lowering of the credit rating was taken due to perceived inadequacy of government action in addressing the fiscal problems of the country. Apparently, the Congress seemed not to have the sense of urgency in approving the seven other tax revenue bills that will generate PhP80 billion to curb the growing fiscal deficit. The message is that complacency from a legislature infamous in the past for its pork-barrel approach, is now out of time.
Government officials did not expect S&P's decision to come out so soon and were somewhat miffed by the announcement, claiming that the rating agency had scheduled to send a mission to the country in February to conduct a formal review. However, as early as October last year, S&P had already sent warning signals about a possible credit downgrade. 
Yet overall, the sentiment of the business community is becoming more upbeat. The sale of US$1 billion of new bonds appears to have been well timed with the issue oversubscribed. The Philippines bourse continues to be among the best performing in Asia, boosted recently by the potential for new large-scale mining and minerals investments and the peso has started to move upwards against both the US dollar and the Euro on the prospects of further reform.

Is the present growth path sustainable?
With certainty, the pleasing result for 2004 shows an underlying resilience in the economy. However, much of the growth is consumption driven and is reflected in consumer spending on food, mobile phone services and more recently in housing. Yet the remittance factor also underscores the fact that within the Philippines, unemployment remains unacceptably high. Remember that the official unemployment figures only record those looking for work and does not count those who have given up looking. Official figures, as bad as they are, are again understated. But the other factor cited by analysts and not counted within any of the myriad of statistical data presented by government to show how well it is doing, is the high social cost of having family members, and often the heads of households, living and working abroad for much of their working life, just to provide an above-subsistence level of income for their kith and kin remaining behind.
With that caveat in mind, the government is still upbeat on the prospects for a sustained economic recovery. Although the government's fiscal position remains weak, the situation is improving. As noted, the national government's fiscal deficit to end 2004 amounted to PHP186.1 billion. This represents 3.8 per cent of GDP and was considerably lower than the target level of 4.2 per cent. For 2005 the government is hopeful that it can reduce the deficit gap further this year to 3.6 per cent of GDP. By 2010 the government plans to balance its books.
So far (mid Feb 2005) only two of the eight revenue-raising measures sought by the executive have been passed by Congress. These include the tax on "sin" products-an increase in the levy on cigarettes, tobacco and liquor as well as an attrition act that incentivises revenue collection agencies. The third measure, the tax amnesty bill that encourages delinquent taxpayers to regularize their tax status in return for a discount on monies owed to government is still pending in the Senate as is the proposed change to the VAT law.
With measures so far, the government believes it has raised PhP144 billion of the PhP80 billion in projected new revenue to be derived from the new tax measures. Some PhP15 billion is expected to be collected from Republic Act (RA 9334), or the excise tax on "sin" products, while an estimated PhP10 billion is eyed from RA 9335 or the Attrition Act of 2005. About PhP16 billion in revenues from tax amnesty bill, PhP5 billion from fiscal rationalization incentives bill and at least P35 billion from an increase in the vat rate from 10 per cent to 12 per cent. 

The rabbit in the hat
The rabbit of course is the prospect of a revitalised mining and minerals sector. The recently concluded Mining and Investment Conference (Feb2-4 2005) represents the first salvo of a combined government and industry effort to assure international investors that the Philippines is open for business. Attended by more than 300 delegates including almost 100 from overseas, the mining conference was intended both to showcase immediate mining and minerals investment opportunities in the Philippines as well as to assure potential investors that the problems of the past were behind us and that the government was speaking with one voice in revitalising the minerals industry to standards of world's best practice.
More than US$1.6 billion in new investment has already been pledged by Chinese investors and the hope is that the current projects, can generate up to US$6 billion in investment in coming years. The affirmation by the Supreme Court back in December 2004 that foreign companies would be allowed a 100 per cent ownership stake in large-scale mining projects has changed the paradigm for the mining industry, and hopefully for the economy as a whole. In the minerals sector alone, the Philippines is estimated have US$1 trillion in unexploited mineral wealth.
Mindful of the opposition to mining from influential mining activists and from elements within the local Roman Catholic Church, the government is actively engaged in dialogue to ensure that all stakeholders are duly represented in the consultative process while making it clear that obstruction for obstruction's sake will not be tolerated.
The stakes are high. With its vast agricultural and minerals potential, the Philippines is not constrained to follow the growth model of other Asian countries that have built their current levels of prosperity on the basis of manufactured exports to the developed world. Rather the Philippines now has the opportunity to become a resource-based economy along the lines of the Australian model.
The potential is there. The interest is there. A major task for government in the months ahead is to realise this potential. For the meantime, we have not yet factored the potential of the mining industry as a growth driver of the economy in our estimates of economic growth. This could change.

Market Movements
As of end January 2005, the exchange rate of the peso to the US dollar had risen to a 14-month high. On January 31 one US dollar purchased 55.08 pesos and the peso continued to rise during the first week of February. As of 31 December the rate against the peso had been 56.05. The government of course has seen in the recent appreciation, a vote of confidence by international traders while sceptics point to the continual slide in the US currency against other major trading currencies as the determining factor. In truth, both factors have played a part. 
Against the British Pound the rate stood at 104.1894 and against the Euro the rate was 71.9596. While for most of 2004 the local currency unit followed the US currency downward, over the past month it has started to break away under the combined influence of government programmes starting to bite (albeit tentatively), strong inwards capital flows into the stock market, and especially in recent times into mining stocks. 
There is hope that the peso may have finally bottomed out and that a steadily appreciating currency will serve to counter some of the inflationary trends in the economy that are occurring as a result of the restructuring process now underway. The S&P debt ratings downgrade was largely ignored by the markets, supporting the view that the move had already been factored into decision-making. The improving fiscal outlook should see further gains for the peso in coming months provided there is no backsliding. Although overall the pace of reform appears to be far slower than the international community would wish to see, in the local cultural context which puts a strong emphasis on consultation and consensus building, the government considers itself to be doing quite well by its own yardstick. Meanwhile with inflation on the increase some monetary tightening could occur in the near future and an interest rate rise could come as early as February.
The Philippine composite stock index is at a five year high and at one point breached the 2,000-point level before falling back slightly.

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