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PHILIPPINES


 

 

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
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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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 year-on-year.

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 actually declining.

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 circumstances.

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 parlance).

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 past.

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 the Philippines?

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 under control. 

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.

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