Books on The Philippines
Update No: 048 - (21/12/07)
As we noted in our column last month, it has been a pretty
good year for the Philippines. "Growth is up; the budget deficit is down;
the peso is going through the roof (at least when looked at in terms of the
United States dollar); remittances are at an all-time high and business has
"I am a pretty good economist" said President Arroyo recently
"but a very bad politician."
That somewhat disingenuous remark was made while addressing a British business
group recently in London during her November visit. Based on present indicators
she may have felt justified in her comment. But one swallow does not make a
summer and the fact that major rating agencies have yet to upgrade their country
risk for the Philippines gives reason to pause. The outlook has certainly
improved but there are still a few hurdles to overcome.
The government has been targeting 2007 GDP growth in the range of 6.1 to 6.9
percent and there is every indication that this target range will be exceeded.
The hope now is for better than 7.0 percent and there is a fair chance of making
it. The Economist Intelligence Unit is predicting a slightly more modest 6.9
percent for the Philippines this year-but still well above the Asian average.
Numbers from the ADB and the IMF tell a similar story.
Certainly Filipinos can be thankful that in President Arroyo they have a
president who is indeed focused on the economy and on making it more competitive
for the longer term. Globalisation has come to the Philippines but, sadly, at
such a glacial pace that many people are not noticing. They feel the pain, but
not the gain. And as many commentators have pointed out time and again, the
benefits of economic reform are not filtering down to the lower levels of
society. Yes, we are seeking the re-emergence of a Filipino middle-class (after
decades of contraction) but a middle class born of the fruits of overseas
income, earned either directly or received through remittances. To this extent,
the domestic economy is not yet growing its middle class in any significant
numbers. (Indeed there are some recent surveys which suggest that it may still
be in decline although the numbers are inconclusive).
What then is in store for 2008 and beyond? After two years of unprecedented
growth it is doubtful that the economy will do as well next year. For one thing,
the world economy is slowing. That, and the renewed turbulence of global
financial markets, means that predictions for 2008 need to be made somewhat more
But Before looking at the Philippines in any detail it may be worthwhile to lift
the curtain on the world in 2008.
At market exchange rates global growth next year is forecast by The Economist to
slow to around 3.1 percent from 3.7 percent this year (measured at market
exchange rates). US expansion is expected to fall to around 1.5 percent from 1.9
percent forecast for 2007 but the effects will be worldwide. Asia will not be
immune to this but will still be the strongest performer.
Growth may be slowing down-especially as China seeks to rein-in its rambunctious
economy-but the world is still far from a recession. The global economy remains
in expansion mode, but expansion at a more modest pace.
Much will depend on what happens in the United States. The housing market will
need to be watched carefully amid signs of a further deterioration. Stock of
homes for sale in the US market continues to climb and are approaching levels
not seen since the 1982 recession. The US money market remains troubled as
measured by the increased spread of US Treasury rates and the subprime crisis
has created the first sustained systemic liquidity impact on money markets in a
But while the financial turmoil raises risk most economists consider the
situation to be manageable. Corporate positions are healthy and inventories are
not excessive. Furthermore, the weaker dollar has given a new fillip to US
In looking at the global picture for 2008, we can expect markets to remain
volatile and with less appetite for risk. But while there may be some further
deterioration in global financing conditions, we are far away from the
circumstances that led to the 1997 financial turmoil. For one thing, most
countries have heeded the wake-up call of 1997 and have worked to improve their
economic fundamentals-the Philippines included. Currency regimes are now more
flexible, foreign reserves are much higher than they were a decade ago and for
the most part current accounts in emerging markets have gone from deficit to
To the credit of the Administration, the Philippines appears to be well-placed
to manage a more harsh environment. Government has done much in recent times to
improve the fundamentals although some caveat must remain for the present on the
sustainability of some of these measures, and particularly the budget deficit
that is on target for this year but only on the strength of asset sales. Revenue
collection continues to disappoint and is one reason the upgraded credit rating
for the Philippines remains elusive.
President Arroyo is actually a masterful politician. She practices the art of
the possible. Her focus is entirely on the economy and on pushing the envelope
on economic reform. To achieve this she has left the polity relatively
undisturbed (Indeed some would claim she has embraced it). Perhaps she learned
her lesson from former President Estrada who, despite his unusual habits
(unusual for a president anyway) was probably brought down for moving against
vested interests in his efforts to open the economy, more than for anything
While issues surrounding the democratic process (or lack of it) in the
Philippines, continue to excite many commentators in the national press and in
Congress, President Arroyo has shown an almost Thatcherite determination to push
for what she believes in against all opposition. This too augurs well for
further growth to the end of her term.
The markets evidently concur. As of 3 December, the peso had risen against the
US dollar by around 13.8 percent since the beginning of the year and indeed, has
risen against most currencies. Something other than just the weakness of the US
currency has been driving the increase.
Indeed there has, over the course of 2007, been an across-the-board increase in
monetary inflows into the Philippines.
The rise of the peso
China Yuan 9.05%
From I January 207 andas of 3 December 2007: Source: PBLF Research
Gross investment inflows so far have amounted to US$14.7 billion. This is more
than double the performance for the same period in 2006 while gross capital
outflows reached US$10.9 billion on a 124 percent growth. More and more Filipino
companies are going global, contributing to earnings on invisibles.
According to the Central Bank, foreign portfolio investments resulted in a net
inflow of US$3.7 billion in the first 11 months of 2007. This is a significant
rise from US$2.1 billion net inflow a year ago.
Of the total gross inflows, investments in Philippine Stock Exchange listed
shares hit US$11.8 billion in the January-November period this year, up 141
percent from the same period in 2006. Peso-denominated government securities,
primarily FXTNs, comprised 18 percent (US$2.6 billion) of total investment
inflows. The rest pertained to money market instruments and peso bank deposits.
Net foreign direct investment (FDI) inflows amounted to US$1.9 billion in the
first nine months-up 22.3 percent from US$1.6 billion during the same period in
2006. Gross equity capital placements reached US$2.0 billion while withdrawals
were over US$100 million.
Remittances from overseas Filipinos coursed through banks has grown 15.0 percent
year-on-year to US$10.5 billion in the first nine months of 2007.
There are no statistical data for BPO export revenues, but the Department of
Trade and Industry (DTI) expects it to reach US$3 billion to US$4 billion in the
whole of 2007.
The Department of Tourism expects international tourism receipts to hit US$4
billion in the whole of 2007, although again there is no statistical data for
In fact the only significant under-performer this past year has been the export
sector. In export-led manufacturing, the Philippines continues to lose ground to
countries such as China and Vietnam although there are some signs that a
resurgence may be around the corner as more and more companies find that China
has not fulfilled early expectations and that, it is sound corporate policy to
look at a "China plus one" strategy for Asian expansion. Nevertheless
the peso appreciation has hurt the small and medium enterprises that account for
the bulk of economic output.
President Arroyo is confident. But can the run continue? The Economist
Intelligence Unit forecasts for 2008 estimate GDP growth for the Philippines to
slow to around 5 percent next year. Others are not quite so pessimistic but even
the IMF and ADB see a significant slowing. This could put the Philippines back
to where it was a few years back and is not what is needed to lift the country
into the higher growth plane that is so often talked about.
Hopefully this may turn out to be a pessimistic forecast.
The wildcard in the economy could be the mining industry. There are welcome
indications that the policy of encouraging large-scale responsible mining that
would lead to sustainable development is finally taking root. Further
large-scale investment into this sector has been identified and, if present
trends continue, should start adding significantly to capital inflows in 2008
and beyond. At the same time, a number of mining projects are ramping up and
minerals exports are starting to rebound. They will not yet take up the slack
from manufacturing but will certainly make a significant contribution to foreign
exchange earnings that are not there at present. The government is now moving
with all due speed (so it claims) to ensure that the share of revenues from the
extractive industries due to local government are actually paid to them.
Political reform? Forget about it. This is a government that has no intention of
rocking the boat. There is good business to be done in the Philippines but it
will continue to be done the Filipino way. The danger is that belief in the
righteousness of her cause could lead President Arroyo to again ignore public
sentiment and seek to return to power after 2010 as prime minister. There is
much whispering that charter change will appear back on the agenda in the New
Year with the Administration determined to ram through the change to a
parliamentary system by any means possible. This would leave the current crop of
presidential aspirants high and dry and could be the one factor that would push
this country over the edge. For the present we can do no more than wait and see.