Books on The Philippines
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
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
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
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
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
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
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
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
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
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
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
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.
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
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.