Books on The Philippines
Update No: 052 - (01/05/08)
Times are tough and by all accounts they are becoming more so.
We read about it every day in the press now and, thankfully for Malacañang,
people in the Philippines are becoming more concerned over rice, oil and—in
business circles at least—the prospects of a US recession than they are about
the latest scandal to hit government. This is a pity really because it makes
reform, or the groping towards reform, even less likely than it was before. This
can only lead the country into a tailspin. But for the moment, President Arroyo,
who incidentally, is now the most unpopular president of the Philippines ever if
the latest survey data is to be believed, can relax a little as scandals and
rumours of scandals are off the front-pages of the daily newspapers.
While the focus of attention is now on wider issues, with presidential elections
now a scant two years away, the chances of meaningful debate and development of
rational policy are nowhere to be seen at the present time. Hopefully over the
next few months as the dust settles and issues get realigned, that may change.
If it does, you will read about it here.
Growth is slowing
A number of forecasting agencies have this past month reassessed their
global growth forecasts for this year and next. They all seem to come up with
broadly similar numbers and the numbers are depressing. The IMF now sees world
growth this year at 3.7 percent and at 3.8 percent in 2009. The EIU forecast is
3.7 percent this year rising to 3.9 percent next year. (Both are at Purchasing
Power Parity rates although assumptions may vary.)
The IMF believes that there is a “25 percent chance that global growth could
fall below 3 percent this year—equivalent to a global recession.” This is
scary stuff. Up until recently we were all expecting slower growth this year but
nobody was talking about a global recession.
Both the IMF and the EIU see the chances of a mild recession in the United
States as becoming more likely. Indeed the EIU believes it to be a certainty
although a slow rebound is expected in 2009. The pace of the rebound will be
largely governed by lingering problems in the housing market and balance sheet
adjustments of US banks. The Philippines, despite not being exposed to any
extent to the sub-prime market may suffer adverse spin off from these
developments in other ways; from a downturn in export orders to a slowing of
remittances—indeed they are already slowing.
The Philippines posted a balance of payments (BoP) surplus of US$1.69 billion in
the first quarter of 2008, up from just US$1.42 billion a year ago. This was in
large part due to higher exports and higher remittances—at least that is one
view (but you need to study the fine print).
According to the Central Bank remittances coursed through banking channels by
Filipinos working abroad reached US$1.259 billion in February 2008. This was up
in dollar terms by 16 percent from a year ago and put the total money sent home
by overseas Filipino workers at US$2.5 billion, which was 15.5 percent higher
In US dollar value terms, Philippines’ merchandise exports grew 10.7 percent
year-on-year in February 2008, led by significant improvement in the value of
agricultural, petroleum and gold exports during the month when commodity prices
reached fresh record levels.
This really is the old smoke and mirrors trick. By talking up the percentages,
the inference is that the economy is doing well. But we need to remember that
over the past year the peso has appreciated by around 19 percent against the US
dollar and while the international reserves are looking good, the number of
pesos being pumped into the economy from export activity and from remittances is
As a result, growth forecasts for the Philippines are also being quietly
revisited. Publicly, for the moment, the government is still sticking to a hope
that GDP growth will better six percent this year, privately senior government
officials will admit that even five percent would be a good outcome in current
What do others say? The World Bank is forecasting domestic growth in the
Philippines will slow in 2008 to around 5.9 percent while recovering slightly in
2009 to 6.1 percent. For its part the Manila-based Asian Development Bank is
forecasting a slowing to 6.0 percent this year. Looking more on the optimistic
side, the IMF believes that the domestic economy could grow at a higher rate of
between 6.3 and 7.0 percent this year but only under a “strong reform”
scenario. That us the sting in the tail. There is unlikely to be a “strong
reform” scenario. Simply put, with less than two years in office, the
incentive for President Arroyo to take bold measures is simply not there.
As a result the IMF is actually expecting growth of around 5.8 percent this
year. The London-based Economist Intelligence Unit is opting for 5.4 percent as
the most likely outcome. Private bank analysts position themselves around 5.5
percent although some fear it could drop back below 4 percent. The government
has said it is revisiting the numbers but has not come up with any new forecast
at this time.
Bottom line is that despite present business optimism times are getting more
tough and this is impacting on Juan dela Cruz (or “John Smith” in English
Rising inflation on the back of higher food prices is a cause for real concern.
The inflation rate in the Philippines has accelerated to its fastest level in 20
months at 6.4 percent, driven both by high food prices as well as petroleum
products. It was the fastest year-on-year inflation rate recorded since July
2006 when prices rose at the same level. Inflationary pressures are likely to
grow in coming months because of higher food and energy prices and the flow-on
effects of new wage and transport claims.
Food and energy are issues of public concern now
Rising food and energy costs are prime drivers of inflation globally at the
moment. The benign inflation environment of recent years is believed to have
come about as a direct consequence of globalization and the transfer of much of
the world’s manufacturing resources to countries such as China, India, Russia
and the former Eastern bloc. But wage rates in these countries are now
increasing rapidly and the goods they manufacture for the world market are
becoming more expensive adding to the squeeze on consumers and nowhere is this
more pronounced than among the poorer sections of society. Globalization as a
factor in ensuring a low-inflation growth climate may now be a thing of the
Many countries, China and the Philippines included are raising workers base
salaries to mitigate the effects of inflation but this itself is inflationary
and only protects those in the formal sector (which in the case of the
Philippines is only a fraction of the workforce) and only serves to worsen the
plight of those in informal employment and who are usually at the bottom of the
social pyramid. This is now emerging as a major issue since there are indicators
that despite the good growth figures, the formal sector of the economy is
shrinking and the informal sector—the drivers, housemaids and ambulant street
vendors who are not covered by minimum wages or social protection—is growing.
According to the World Bank, global food prices have increased by 83 percent
during the past three months and by 147 percent over the past year. Farm costs
are increasing around the world and cost pressures on the agricultural sector
are intensifying as fuel and fertilizer costs soar in price.
Rice prices have more than doubled since the beginning of 2008 and this has now
become a major issue in the Philippines. The fear is that it is also becoming a
political football as the government has grasped at the rice issue as one means
of diverting attention away from scandals.
World Bank President Robert Soellick warned recently that 33 countries—the
Philippines and Indonesia among them—are at risk of social upheaval because of
rising food prices. Rioting over the rising cost of food, which can account for
up to 75 percent of a family budget in the poorest communities, has already
broken out in several African countries and in Haiti the president was forced to
resign over the food price issue. No wonder Malacañang is taking the rice issue
very seriously indeed.
The high price of oil—which recently broke the $112 per barrel for May 2008
delivery—has been blamed largely on speculators but while speculation is
playing a role in the food market too, it is not the primary factor. US policies
pushing corn-based ethanol have been singled out for criticism at recent
international meetings but this too is only part of the story. Commodity prices
are rising generally as populations in emerging markets become more affluent and
with the emergence of a middle-class with middle-class appetites. The general
consensus is that high food prices will be around for a while. Countries such as
Brazil that base their ethanol production on sugar are in a good position to
reap the benefit of the changing market condition. Is there a message her for
As several analysts have pointed out the real danger of food scarcity comes from
reverse protectionism as countries move to protect their own food reserves by
banning or taxing exports. Indonesia, which is experiencing a bumper harvest and
is expected to produce 32.63 million metric tons of rice this year (and with a
surplus of 1.2 million tons), has said it will ban private commodity traders
from exporting Indonesian rice. Indonesia’s long-term position remains
precarious however, although for the moment it appears to have the situation
Not so in the Philippines which continues to be the world’s largest importer
of rice due in large part to the short-sightedness of agricultural policies.
According to the Bureau of Agricultural Statistics, annual per-capita rice
consumption in the Philippines grew by 28 percent to 118.7 kilograms per year in
2006 from 92.53 kg in 1990. That works out to around 11 million tons of rice a
year in total. This year local consumer needs will be met by importing 2.2
million tons of rice from neighbouring countries—assuming supplies are
available. (There are reports from reliable sources that Thailand has offered
the Philippines as much rice as it needs but that for some reason the Philippine
government has not responded to the Thai offer sparking thoughts that the
shortage is actually being manufactured for political reasons.)
Per capita rice consumption is higher in the Philippines than elsewhere in Asia,
mainly because of the lack of other dietary alternatives. Rice consumption
generally declines as per capita income increases. In Japan the comparable per
capita figure is 61 kg; in Taiwan, 48 kg and in South Korea, 79 kg. These
numbers put the political importance of rice supply into perspective.
As pointed out in the April 14 2008 issue of the Wall Street Journal, “alone
among World Trade Organisation member nations, the Philippines imposed
quantitative restrictions on rice imports, implemented by a government
monopoly.” The result has been domestic rice prices that have been
historically around twice the global price while, ironically, local rice farmers
have remained among the poorest of the poor. In the highly politicised
environment (which will only get worse in the run up to the 2010 presidential
election) there is much finger-pointing and stop-gap measures being put in place
but no sign of a longer-term strategy.
Indeed the signs of retrogression abound. The Philippines remains the fourth
largest economy in Southeast Asia, but this may soon be overtaken by other
countries which are growing more rapidly. In its World Development Indicators
2008 released last week, the World Bank placed the gross domestic product (GDP)
of the Philippines using the Bank’s purchasing power parity estimates (PPP) at
US$250 billion as of 2005. In terms of per capita GDP, also using PPP, the
Philippines came in at US$2,956 in 2005, which was lower than Singapore's
US$41,479; Malaysia's US$11,678; Thailand's US$7,061; and Indonesia's US$3,209.
However, per capita income in the Philippines was still higher than Vietnam's
US$2,143 as of 2005.
Latest census results released
Population growth continues to confound attempts to really lift the economy.
According to the latest census data, just released this month, the Philippine
population grew by 12.07 million or 15.7 percent in the seven years from the
last census—from 76.50 million in 2000 to 88.57 million as of August 2007 when
the new census was taken. Final results of the latest census of population
conducted by the National Statistics Office placed the country's population at
88,574,614 persons as of 1st of August 2007.
Congress resumes this week. There is no sign that it will tackle the rice
problem in any meaningful way; nor that it will look into the need to improve
productivity to give greater incentive to investors so as to reverse the drain
from the formal economy to the informal. This being Earth month and with the
signs of global warming becoming ever more evident (this month Manila
experienced its hottest day on record) there might have been an expectation that
issues surrounding climate change would be addressed in a serious manner. Not
so. Instead Congress intends to reopen debate on Charter Change. Congress
fiddles while the Philippines burns. Nothing changes. Nothing ever will.