Books on The Philippines
Philippine peso (PHP)
Update No: 025 - (30/01/06)
The end-of-year holiday season provided a welcome break from
the rampant politicking so evident in the latter months of 2005 but the respite
proved to be sort-lived. Yet, President Arroyo has emerged in a stronger
position politically by the failure of her opponents either to unseat her or to
have her removed. Yet, this strength has limitations and whether the country as
a whole is stronger as a result of the turmoil of 2005 is a moot point. The
answer is that it probably is not. President Arroyo has undoubtedly lost much of
her moral suasion and freedom to manoeuvre. That she is still able to command
support and allegiance is, increasingly, a reflection of the horse-trading that
is taking place - especially in government appointments.
As January progresses there are talks of fresh restiveness within the military
and especially relating to the politicisation of the senior echelons where
loyalty to the president rather than adherence to promotion by merit is claimed
to be taking its toll on officers and enlisted men alike. Such talk is unlikely
to lead to any precipitous action, but it is unsettling nonetheless. There are
rumblings too that suggest that the free hand granted to those key economic
officials who came into government to replace those who resigned in July last
year is being pared back. Will we see more resignations this year due to
political meddling in key portfolios? Only time will tell.
President Arroyo has set her agenda for this year as embracing three key areas
(1) Constitutional reform; (2) bringing peace to Mindanao and (3) reducing
poverty. It is likely that there will be some forward movement this year.
Evidently, the government believes that it has already done all it can,
legislatively speaking, to restore health to the country. But progress on any of
these issues presupposes that the economy will continue to move forward. In this
regard it is reasonable to expect that-all other things being equal-2006 may be
a slightly better year for the Philippines than 2005. If it pans out as
anticipated then President Arroyo will have a much needed respite that should
see some recovery of her tarnished image.
Leaving aside for a moment, the external threats to economic growth (except to
note that the general consensus appears to be that in global terms, there will
continue to be a gradual slowing of the world economy-and in particular US
consumer spending-and this will have repercussions for export growth throughout
Southeast Asia) and looking at the key domestic factors that will drive growth,
we see both positive and negative factors at work although overall we remain
optimistic that this year may well be better than last.
A continuance of population-driven growth
Economic growth in 2006 will remain largely population driven, which means
remittances and consumer spending will continue to drive business activities.
With the domestic economy still producing far fewer jobs than required to soak
up those entering the workforce, many Filipinos have little choice but to seek
employment overseas. Even so, unemployment remains unacceptably high throughout
the Philippines and in some parts, unemployment and underemployment is extreme.
At present, some eight million Filipinos are reportedly living and working in
other countries. In the local job market, some 2.62 million adult Filipinos or
7.4 percent of the labour force (ILO definition) are unemployed while another 7
million or 20 percent felt they were underemployed, as of October 2005. These
numbers probably understate the true situation in the country - especially if
unemployment is taken to mean exchange of labour in return for a liveable wage
that would lift an individual and his/her dependents above the poverty line.
Clearly that is not the case. More people are coming to regard themselves as
Aside from the absolute number of Filipinos seeking employment overseas, a
structural shift is underway. Whereas in previous years, land-based deployment
(as distinct from mariners) was concentrated in semi-skilled areas of factory
processors and domestic helpers, increasingly professionals are seeking jobs
overseas in such fields as nursing and health care, computer and IT
professionals as well as teachers. Already this is having an impact on service
delivery in a number of key areas of the economy but, significantly, in the
development of social infrastructure.
According to the Commission on Population, the number of Filipinos is expected
to increase by 1.7 million - around 2 percent to 86.7 million in 2006 from 85
million last year. At this rate of growth the population of the Philippines has
doubled in just under 30 years -the population now is twice that of 1977.
While the latest labour force survey result is encouraging in terms of
suggesting that domestic employment growth is increasing more rapidly than the
population as a whole it is worrisome that employment in the industry sector has
barely moved. Farm output last year grew well below the 3.3 percent growth
recorded in agricultural employment suggesting a decline in real incomes. The
services sector (which added 1.13 million new jobs) also includes those employed
in the public service at national, provincial and local levels and which
contributes only marginally to productivity. This sector also includes those
engaged in small business including itinerant vendors. (Employment in the BPO
sector is measured in the tens of thousands, not in the millions.)
With the additional revenue made available to government this year, a fund of
PhP1 billion (around US$19 million at present exchange rates) has been set aside
for promoting the small business sector through providing micro financing
opportunities. While this is an encouraging development, the underlying cause of
rural poverty (in particular) is not really being addressed - that of providing
farmers with clear asset titles against which they could borrow from commercial
lenders to establish business enterprises or upgrade their farm output. Land
reform has been the catalyst of economic emancipation in much of Southeast and
East Asia, but is not happening in the Philippines on other than a token scale
at the present time.
The growth drivers
In a nutshell, the factors driving the economy forward in the year ahead are
likely to be the same as those evident in previous years. It will be
consumption-led growth fuelled by remittances rather than the investment-led
growth that the country so desperately needs if it is to break out of the
Among the positive factors that will influence economic activities this year are
the expected increase in earnings abroad, the rise in tourist arrivals, the
expansion of IT-enabled services, new investments in mining and other sectors,
the recovery of the construction sector, and the positive sentiments emanating
from fiscal reforms. The fiscal deficit is expected to ease to PhP125 billion
from around PhP160 billion or 2.9 percent of the GDP in 2005.
With the implementation of a two-percentage point increase in the expanded value
added tax (EVAT) rate from 10 percent to 12 percent by February, inflation is
expected to remain high at 7 to 8 percent in the short term. However the VAT
increase, while not particularly welcome, appears to have been accepted by
business as a necessary price to pay for moving the economy forward.
High savings of OFW families, as hinted by the rising growth rates in financial
services in 2005, will augur well for the growth in consumption and investment
this year. Among the sectors that can benefit from this are real estate,
automotive industry, telecommunications, logistics, travel, food manufacturing,
transportation, education, healthcare, and the small business sector generally.
Banks are expected to keep high returns, with a decline in their non-performing
loans and the transformation of their non-performing assets. An upgrade of the
country's sovereign debt rating, while not yet an immediate likelihood, is at
least on the horizon and should provide added incentive for the administration
to stay the course.
The Philippine peso will continue to get a boost from strong dollar inflows this
year. While a strong peso has been helping the country in its foreign loan
payments, there are signs that it is hurting the export sector. Officially,
exports are expected to grow by 8 to 10 percent in 2006, supported by increased
shipments to China. However, at this time last year there was a similar
expectation of an increase of around 10 percent. Frankly, at this stage we do
not see it happening-certainly not from the traditional mainstay of the export
sector-that of electronics. We expect the electronics sector to have another
tough year as global consumer spending slows.
Local stocks, as measured by the Phisix, could well climb toward the 2500
psychological mark, as selected companies continue to register strong growth in
net income (The record high was 3300 prior to the 1997 Asian financial crunch).
The planned initial public offerings (IPOs) of large companies such as broadcast
firm GMA Network Inc., and energy company First Generations Holdings are
expected to generate fresh interest in the local bourse. Foreign portfolio
investments are expected to keep coming in and at an increasing rate, although
never underestimate the ability of politicians to throw a spanner in the works.
A new political impasse could well interrupt the positive mood pervading the
More Investments into mining?
So far, according to the official statistics, foreign mining companies have
committed US$350 million in fresh investments into the sector that could,
eventually, yield billions of dollars in mineral exports. The private sector-led
Chamber of Mines is confident that it can attract up to US$6 billion worth of
foreign equity into local mining by 2010. This may again be over-optimistic.
While a number of new mining projects are expected to start this year, other
projects continue to be on hold pending resolution of disputes at the local
level. While national policy is now unequivocally in favour of the development
of a world-class minerals industry for the Philippines, some provincial and
local government units, with the support of some non-governmental agencies
(often foreign funded), continue to thwart efforts to develop international
mining projects. Interestingly, in many instances these same NGOs do not oppose
small-scale mining which, so they claim, is a traditional livelihood activity.
Yet independent research has shown that it is the traditional mining that has
caused the bulk of previous environmental degradation in mining areas and which
continues to pose the major threat to the environment.
A further issue complicating the development of further mining activity-and
consequent large-scale investment-in the Philippines is the fact that a number
of claims that have commercial potential are not moving forward due to excessive
demands on the part of those sitting on their claims-some still current, but
others that have expired. In fact industry sources claim that while the
government last year cancelled some 63 leases, the only ones cancelled were
those that had no commercial potential whatsoever. Other leases, with potential
but lying dormant have not been cancelled. It seems that at the present time the
government lacks the resolve to force the commercial development of many mining
areas and, with boom prices not expected to last indefinitely, there is a clear
danger that, yet again, the Philippines may "miss the boat" in terms
of realising the full potential of this sector.
Leaving aside the mining sector, recent data from the Central Bank and other
sources shows that investment pledges into a number of sectors continues to be
on the rise. Investments registered with the two largest investment promotion
agencies went up by 20 percent to around PhP225 billion in 2005 from PhP186
billion in 2004. In particular, investments registered with the Board of
Investments (BOI) reached PhP158 billion in 2005, or up by 16.4 percent from
PhP136 billion in 2004 while those registered with the Philippine Economic Zone
Authority (PEZA) rose to PhP67 billion from PhP50 billion. Of course, an
investment pledge creates no new wealth and no new jobs until that pledge is
actualised. Nevertheless, the trend is encouraging. Pledges made in 2005 are
expected to bear fruit in 2006 and some represent investment into new export
activity which would be welcome. These figures do not include yet planned
investments in two other agencies - the Clark Development Corp. and the Subic
Bay Metropolitan Authority.
Recovery of the construction sector
Once realized, planned investments are expected to augur well for new
private construction activity. The growth of the IT-enabled services sector is
already pushing demand for new office space and the construction of
purpose-built offices. According to the Business Process Outsourcing Association
of the Philippines (BPAP), exports of IT services will grow a further 70 percent
to US$3.4 billion in 2006 from US$2 billion in 2005, on the back of expansion
plans by new and existing industry players.
After dropping by 3 percent in the first three quarters of 2005, public
construction is also expected to recover somewhat this year, with the release of
initial funds for major infrastructure projects such as US$60.23 million for the
Subic-Clark-Tarlac Expressway, US$26.32 million for the Southern Tagalog
Arterial Road, and US$23.95 million for the expansion of LRT Line 1 within Metro
The government is set to release US$64.7 million representing 20 percent of the
budget cover for the Agno River Flood Control Projects Phase II-A and by 2007,
construction of modern airports in the cities of Iloilo, Bacolod and Tacloban
are expected to be in full swing.
Other projects in the pipeline include the PhP25-billion Northrail project,
PhP5.2 billion Subic International Port, PhP3.6 billion Manila Third Sewerage
Project, and PhP3.4 billion rehabilitation of the Philippine-Japan Friendship
Highway (actually, a road network that extends from Northern Luzon all the way
However, growth within the construction sector will, for the time being, be
tempered by conditions in the banking sector which is still in recovery mode as
distressed debt washes out of the system. For the time being therefore recovery
in construction may be patchy until such time as the banking sector fully
recovers and an upgrade in the country's sovereign debt rating allows for better
liquidity in the system.
Growth areas for the economy
In tourism, the government expects to generate US$3 billion in revenues from
the arrivals of three million international visitors in 2006, up from US$2.6
billion last year. This is good news for hotels, restaurants, airlines, and
other tourism-related businesses. It should also serve to encourage further
investment into related entrepreneurial ventures including hire cars, theme
parks and such-like.
In telecommunication, the introduction of third-generation (3G) mobile phones
services is expected to further increase household spending for services while
the deregulation of Voice over Internet Protocol (VoIP) technology will induce
further competition into the local market.
The challenges to growth
A mix of domestic and external factors poses risks to higher growth for the
Philippine economy in 2006. On the domestic front, while political tensions-at
least at current levels-may not affect output production, if taken to extremes
such tension could undermine the present positive sentiment towards the local
bourse and the currency market.
Debate on charter change will certainly occur and could be divisive. The
principal risk in the charter change debate is not so much to short-term growth
but rather to longer-term economic prospects as fresh uncertainties engendered
by large-scale Charter change will undoubtedly weigh on the minds of potential
investors. It all depends how the debate is handled. Few would argue with the
need to overhaul the present Constitution. It has been found wanting in a number
of important areas. But the proposal to amend the Constitution in a way that
changes the system of government from a unitary and presidential model to that
of a parliamentary and federal system is no amendment at all. Rather it is a
complete abrogation of the present Charter and one that will take the entire
country into uncharted waters. Can the Philippines afford the luxury of such
debate in the present uncertain climate? We think not. That it will happen
anyway, in spite of wise council to the contrary, is almost a certainty.
Increased consumer prices, induced by persistently high crude oil prices and the
implementation of (much needed - but inflationary) tax reforms could continue to
dampen consumer and business spending, at least in the short term and will make
investors more cautious. Rising interest rates, imposed by the Central Bank to
curb inflation, could further weigh on corporate finances, even though the
Philippines is following a global trend in raising rates.
The challenge for the government is to restore political discipline without
threatening the country's democratic principles and to ensure the sustainability
of fiscal reforms and economic progress, despite negative public perceptions. In
order to achieve this it will be banking on a stable external environment.
Global factors and risks
On the external front, continued high oil prices will remain a significant
factor constraining global economic growth. Yet the slowdown has actually been
quite modest. 2004 saw the global economy put in its best performance in a
quarter century and a year ago fears were being expressed that the slowdown
would be dramatic. This did not happen. While a further modest slowdown is
expected this year, the world economy is expected to stabilise in 2007 and 2008.
But consumer fatigue is starting to influence US spending patterns and the
monetary stimulus given to that economy in recent years is already at an end.
The US economy is overdue for a correction. The question is only a matter of
"when will it occur" and how deeply will it influence the global
High energy prices and rising interest rates will continue to exact a toll on
domestic demand in the major OECD economies although by historic terms, growth
will continue to remain robust. Asia will continue to outperform all other
regions. The Economist Intelligence Unit, in its latest forecast, expects world
GDP growth to expand at around 4 percent this year (at purchasing power parity
rates). This is down from 4.4 percent expected in 2005 but still much stronger
than was recorded during most of the last decade.
Locally, the surge in oil prices last year has already resulted in a much higher
rate of inflation than was previously forecast. In 2005, consumer price
inflation in the Philippines was among the highest in developing Asia. The
inflationary effect of higher energy prices plus the application of a 3 percent
(effective) minimum VAT has resulted in higher operating costs to the business
sector and in many instances margins have been squeezed. The increase in the
Value Added tax to 12 percent, expected in early February 2006, will send a
further inflationary surge through the economy but, hopefully, it will be a
one-time surge after which inflation will start to fall - aided by the stronger
peso. The general prognosis is for inflation for the year as a whole to fall to
7 percent or below. With reasonable expectations, the rate of inflation should
ease further next year to below 6 percent.
As already noted, a rise in longer-term US interest rates could impact on the
future cost of borrowing and suggests that the Philippines needs to put its
fiscal house in order as quickly as possible so as to free up resources for
much-needed productive investment. In the USA, short-term rates rose last year
by 325 basis points, reducing domestic liquidity. There is growing concern that
short term paper is out of synch with long term investment. This imbalance has
led to an inflated asset market and a correction is overdue. Most immediately
this will impact on consumer spending patterns as the ability of consumers to
borrow against their fixed assets declines. But the problem goes deeper than
this. The US economy is burdened by record trade deficits. The current account
deficit is now more than 6 percent of GDP having been driven upward over the
past twelve months by higher than expected oil prices and stronger than expected
The sheer size of the external deficit means that the United States needs to
attract over US$800 billion in foreign capital each year just to sustain its
economy. That is a huge amount to take out of the global trading system. The
answer of course, is to raise US longer term interest rates to support the
inflow in the short-term while allowing a gradual depreciation of the dollar
over the longer term so that the US can trade its way back to economic health.
In the meantime, raising the interest rates further will likely cut headline
For the Philippines, the state of the US economy will complicate efforts to
build more rapid export growth. The situation is not much better in other major
markets. Europe is expected to do slightly better this year than earlier
expected, with several of the major economies starting show signs of
improvement. Yet growth in Europe (E12) will remain modest at around 1.7 percent
and so far there has been no resurgence of consumer demand such as would bring
gains to Filipino exporters.
In Asia the story is not dissimilar. Japan appears to be on the road to recovery
but it will be a slow process. Furthermore tax increases due to be implemented
later in 2006 or by early 2007 at the latest will weigh on consumer spending. As
a result, growth in the Japanese economy is expected to slow to around 1.3
percent in 2006 and 1.1 percent in 2007 and 2008.
The risk of a sharp slowdown in China has increased although Beijing is still
trying to engineer a soft landing for its bloated economy. With more than 100
percent overcapacity in several key sectors and a weakened authority over the
provincial-level leaderships, it will be no easy task. Any sudden crash in any
one sector could quickly follow through to China's fragile banking sector. This
would likely lead to a domino effect on growth throughout the economy. In 2005
the Chinese economy continued to grow at more than 9 percent- a faster rate than
many had expected although the general expectation is that if the Central
Government can engineer the "soft landing" needed, then we can expect
growth to fall to around 8 percent in 2006 and further to around 7.3 percent in
Again there are implications for the Philippines in these numbers. China is
poised to become the country's top export market over the next few years. Last
year, Philippine exports to China soared by more than 50 percent, offsetting the
decline in shipments to Japan, currently its largest trading partner and
elsewhere. Such a growth surge is unlikely to be repeated unless the Philippines
can unlock its resource base and once again become a major resource exporter. If
it can do so, it will have in China (and in Korea) willing buyers that will
allow Philippines exports to make their own "Great Leap Forward."
So what does it all mean?
While the Philippine government is keeping to its economic growth target of
5.7 to 6.3 percent for 2006, local and foreign institutions are forecasting a
more modest growth band of 4 to 5 percent. We believe these latter estimates to
be more realistic than the official numbers, given the external and domestic
factors that could impact to affect economic performance this year. Our own
growth forecast of 4 to 5 percent for 2005 turned out to be accurate (although
perhaps there was more luck in that than we should probably admit).
Importantly, the agriculture and fishery sector is expected to return to better
growth levels (of 3 to 4 percent) this year, in the expectation that the El Niño-influenced
dry spells will not cause as much damage as they have done in recent years. Many
areas, especially in Mindanao have been ravaged by drought and consequent crop
failure, sometimes reducing whole provinces to poverty.
The industry sector is forecast to grow this year at between 3 to 4 percent,
with the expected recovery in construction and a modest increase in mining
activity as a number of pre-existing projects become fully commercialised. The
best performer is expected to again be the services sector which is most likely
to grow at a range of 4.5 to 5.5 percent on the back of the buoyant
telecommunication, IT and travel sectors.
The sad fact though is that among Southeast Asian countries, the Philippines may
once again lag behind in growth performance, although it is one of the least
vulnerable to emergency risks such as bird flu outbreak.
We would also be remiss if we did not take note of the fact that despite the
picture of economic health painted by the macro statistics is the fact that the
great bulk of the population does not appear so far to have benefited from the
improving numbers. Of course, lag effects in the economy are a major factor and
there is some hope that with the improving economic fundamentals and a reduction
of the debt service payments abroad, resources will be freed up to invest in
social infrastructure-particularly in the delivery of quality education, health
and nutrition services.
But the truth is that systemic imbalances also play a large role and, for the
present, will continue to do so. Far too much revenue continues to be lost to
corruption and there are serious doubts as to whether this will improve under a
parliamentary system of government. In fact, the key role played by
congressional leaders in the selected release of funds to local government
units, suggests that the problem could actually get worse until such time as
local government units are given greater powers to raise their own revenue or
their revenue allocations become a matter of automatic appropriation. At the
moment, with the Treasury desperately trying to balance the books and attend to
competing needs, nothing is automatic.
The opportunity to make a clean sweep of the bureaucracy and to introduce a
meritocracy throughout the civil service has probably been lost for the
foreseeable future. We have already pointed out elsewhere that the ability of
the president to hire and fire goes much deeper in the Philippines than in any
other Asian country and so far we have not seen anything in the recommendations
of the Constitutional Review Commissions that would curtail this power of
As we head in the new year, there is more reason for optimism than pessimism but
it is a conditional optimism tempered by the fact that the Philippines is
marching to the beat of the same well-worn drum.