Books on The Philippines
Philippine peso (PHP)
Update No: 012 - (10/01/05)
President Gloria Macapagal-Arroyo's sojourn at Malacañang Palace was finally
legitimised when she won a fresh six-year mandate at the May 2004 presidential
polls over popular actor Fernando Poe Jr (FPJ). The actor's untimely death from
a stroke in December caused a renewed bout of tension, since many feared that
his high-profile funeral would be used by the opposition to foment fresh unrest
against the government. Many within the opposition ranks, especially some of the
more radical groups, still believe that the election result was rigged and that
FPJ was the rightful winner. Intelligence reports circulating following the
actor's death also suggested that some people would try to use the highly
emotive funeral atmosphere to provoke an uprising.
It did not happen that way and while the funeral crowd was indeed huge, the
event passed without incident. Nevertheless the tension was palpable especially
within the ranks of the highly politicised military and among officials at
Malacañang Palace. For the moment however, the president continues to receive
the support of the top military and police generals - some claim that this is
only by promising them lucrative posts in government after their mandatory age
of retirement from the service. If ever the top generals are asked the question,
their predictable answer is that "the president is in control."
Nevertheless the Philippines has ended the year 2004 with a much welcomed return
to political normalcy after the hiatus of recent years. Her mandate at the polls
- and hence legitimacy in office - has defused much of the tension surrounding
the manner in which she came to the presidency. Her more challenging task now is
on the economic side, with much expectation that she will finally use her
mandate, assert her authority and take the "giant strides" needed to
open up the economy, balance the books and cure the chronic fiscal deficit,
which economists have warned could infect the private sector's finances within
two years, if the pace of reform is too slow.
There are many who remain perplexed at the seeming unwillingness of the
president to take tough decisions and assert her authority, especially over
Congress. Many commentators believe that during the first six months of her new
presidency, Mrs. Arroyo squandered much of the political goodwill she had upon
winning a new term of office. Much criticised has been her penchant to make
political appointments rather than appointments on merit and her erratic
decision-making process. It will be recalled that she took a bold step in
declaring a fiscal crisis in September only to recant it and claim the crisis
was over when the cost of borrowing went up as a result of her earlier
In particular, despite the need for urgent fiscal reform, Congress only passed
one of the eight new revenue measures last year and although there is still hope
of action when Congress resumes, the pace of reform is excruciatingly slow. By
2010, the government seeks to balance its books and eliminate its annual deficit
amounting to around 4 per cent of the gross domestic product (GDP) at present.
Yet, in spite of her failure to institute any major economic reform in her
four-year stint at the seat of power, President Arroyo still enjoys the support
of the business community and the Philippine media.
While the Philippines was spared from the giant tsunamis that wrought
destruction in the islands of Indian Ocean at the close of the year, four
typhoons unusually late in the year had earlier battered eastern Luzon and parts
of Visayas, causing massive loss of life as well as damage to livelihood and
property. It is estimated that the damages from these typhoons dented the GDP
growth in the fourth quarter by around 0.5 percentage point.
Amid the lingering political tension, the fiscal crisis and the natural
disasters in the last quarter, the economy still found room to expand by 6 per
cent in 2004, thanks to favourable weather conditions that boosted agriculture
and fisheries in the first three quarters of the year, continuous expansion of
the services sector and the late surge of dollar remittances from abroad.
If the same conditions persist, the economy will most likely grow by 5 per cent
in 2005, despite the expected slowdown in the economies of most industrialised
countries and of China.
Year in Review - 2004
According to a presidential spokesman, the year 2004 was a "challenging
year" and one where the president's attempt at bold reform "faced
resistance, frustration and disenchantment." "The president exercised
strong leadership in 2004 at the expense of her own popularity in order to
commit the nation to a long-term vision of stability and growth," he said.
Following her win in the May election, the president introduced her 10-point
development agenda, which was further given flesh in the 2004-2010 Medium Term
Philippine Development Plan. Among the major concepts within the economic plan
are that of a balanced budget, education for all, automated elections, better
transport infrastructure, an end to local hostilities, a healing of the
political wounds, electricity for all, opportunities for livelihood and jobs,
decongestion of Metro Manila, and the Subic-Clark alliance as a future growth
These are all noble objectives but it is the public sector debt that has seized
the attention of most people in the immediate term. Unless the runaway debt
problem of government and public sector agencies can be reigned in - much of it
resulting from a misallocation of resources and cross subsidizations especially
in the energy sector (plus a decline in revenue collection relative to GDP), the
government will have precious little to spend on new programmes.
Early into her new term and faced with a Congress that appeared to have
overlooked the sense of urgency of fiscal reform, the president declared a state
of fiscal crisis. She did so after news that the consolidated public sector debt
had reached more than 130 per cent of the gross domestic product (GDP), -
something that the World Bank considered to be a cause for alarm.
The declaration of a fiscal crisis finally created a sense of urgency among
lawmakers in the passage of critical revenue reforms aimed at increasing taxes.
However, early resolve quickly dissipated and by the end of the year only one of
the eight reform bills submitted - the Sin Tax Bill - had been passed by the end
of 2004. Yet there is still hope that other reforms will be enacted early this
The final official figures on growth rates for 2004 will not be released until
February 2005; however, GDP growth in 2004 most likely exceeded the government
forecasts. The economy actually expanded by 6.5 per cent in the first three
quarters of the year, a figure that surpassed the official government target of
4.9 to 5.8 per cent for the whole year.
The high inflation rate, which dampened consumer spending, and the onslaught of
four typhoons in Luzon in the fourth quarter will likely pull down the full-year
GDP growth to around 6 per cent in 2004, early estimates suggest. Still, this is
considerably better than the 4.7 per cent growth registered in 2003.
Gross national product (GNP) which includes factor income from abroad, posted a
6.2 per cent growth in the first 9 months, dragged down by a moderate 3.2 per
cent increase in national factor income from abroad (NFIA), a figure that
reflects the earnings of Filipino enterprises and individuals in other
Personal consumption expenditure (PCE) was particularly impressive last year,
growing by 5.9 per cent in the first three quarters. Due to government's
austerity measures, public spending was down by 1.9 per cent yet private
spending remained buoyant.
In the January-to-September period, the agriculture, fishery and forestry sector
expanded by 6.7 per cent; the industry sector, 5.2 per cent; and the services
sector, 7.3 per cent. These all put in a better return than in 2003.
Among the subsectors indices, the fastest growth was noted in forestry, at 42
per cent; transportation, communication and storage, 10.8 per cent;
construction, 10.5 per cent; finance, 8.9 per cent; trade, 7.1 per cent; private
services, 6.7 per cent; agriculture and fishery, 6.5 per cent; and mining and
quarrying, 6.2 per cent. For one, the number of building permits issued in the
second quarter of 2004 rose 18 per cent over the previous year while the total
value of construction was up 25 per cent.
The latest data shows that approved foreign direct investments (FDI) surged 322
per cent year-on-year to P148.2 billion (US$2.6 billion) as of September 2004,
mainly because of the new projects in the energy sector. The Department of
Labour and Employment reported that the incidence of industrial action fell to
its lowest level in nearly three decades last year. According to the Department
of Tourism, tourist arrivals grew by nearly a fourth to 1.861 million in the
first 10 months of 2004, due to the influx of inter-regional travellers from all
The National Statistical Coordination Board (NSCB) has also noted improved
figures for employment, cement production, car sales, mobile phone sales,
electricity sales, tourist arrivals, hotel occupancy, revenues of restaurants,
sales of appliances, and OFW remittances.
Volume of production was up 9 per cent in October, indicating increased demand
for the holidays. A regional economist from the University of Asia and the
Pacific estimated that the country's 27 largest urban markets, worth around P1
trillion (US$20 billion) annually, saw their net sales grow by 10 per cent or
P10 billion (US$2 billion) in 2004.
In Metro Manila, electricity consumption was up by 5.7 per cent in September,
led by the pickup in demand from commercial and industrial users. However,
electricity rates became more expensive, rising 89 centavos per kilowatt-hour,
as the government tried to help the National Power Corp reduce its losses by P32
Gross international reserves stood at close to US$16 billion by the end of 2004,
which is a healthy indicator, according to the Bangko Sentral ng Pilipinas. The
budget deficit reached P197 billion, accounting for 3.8 per cent of the GDP in
2004, down from 4.6 per cent in 2003. The country's external debt was estimated
at US$55.6 billion as of September 2004.
Bilateral trade grew 8.9 per cent year-on-year to US$66.54 billion in the first
10 months of 2004, with exports rising 8.9 per cent to US$32.643 billion and
imports going up 8.8 per cent to US$33.9 billion. The country incurred a
US$1.257-billion trade deficit in the ten-month period.
The peso settled at around 56 to the dollar. Economists said there is enough
room for the local currency to further depreciate against the greenback to help
exporters. However, the peso devaluation over the past decade, amounting to half
of its original value, weighed on the banking sector, whose non-performing loan
ratio remained high at 14.2 per cent as of October.
An important trade development is that the market bloc of China, Hong Kong and
Taiwan has overtaken the United States, Japan and Europe as the top destinations
for Philippine products.
Four notable developments in 2004 are expected to continue making the headlines
in 2005. The government took over the modern Passenger Terminal 3 of the Ninoy
Aquino International Airport, hoping that the facility, built by a German
construction firm, would be finally opened in six months.
In early December, the Supreme Court took the unusual step of reversing an
earlier decision and affirmed the legality of the 1995 Mining Act, which allows
foreigners to participate in the local mining industry with one hundred per cent
equity. The government has also made some progress in the privatisation of its
power generation assets, with the successful bidding of the Masinloc power
plant, one of the country's largest generating assets to be put on the blocks.
Finally, at the end of the year Manila and Tokyo reached a free trade agreement
that will allow Filipino and Japanese traders to exchange a wide range of
products, from fruits to electronics, at reduced tariff rates and that would
facilitate the entry of more Filipino workers, particularly nurses, to Japan. On
the downside, local "entertainers" seeking to work in Japan will, in
future, be subject to more stringent standards as part of efforts to clamp down
on the international trafficking of women.
Growth would have been a lot faster in 2004, if not for the major risks faced by
the Philippine economy, including the grave fiscal deficit, the political
instability that emanated from the May elections, the slow pace of economic
reforms, and the escalation of crude oil prices in the world market that
eventually pushed consumer prices by at least 3 percentage points.
Inflation is on the rise. Consumer price inflation has been increasing for
several months now and hit 7.9 per cent in December. It averaged 5.5 per cent
for the whole of 2004. This weighed hard on the poor and the jobless and could
yet translate into further unrest especially as the increased prices of
electricity and fuel costs have a ripple effect throughout the economy as a
whole. The National Statistics Office reported that as of October, the
unemployed represented 11 per cent of the labour force. Another 17 per cent was
After winning the May 2004 presidential election, President Arroyo has
established her right to her throne, which had been contested during the three
years that she stayed in Malacañang Palace as an appointed president.
This fact has been instrumental in settling the country even though some
elements of the opposition appear to remain in denial over the result and claim
that the election was "stolen" from them. For the most part however,
the country is returned to move on. Her win has been accepted by the military
leadership and even by the formal opposition parties comprised mostly of allies
of former President Joseph Estrada and the former presidential aspirant Fernando
Poe Jr., - since deceased.
Mr. Estrada, however, remains a political force to reckon with, especially after
he threatened a new uprising during Mr. Poe's wake in December. Fortunately for
the country this proved to be no more than wishful thinking.
The president's attempt early in her second term to revamp the Department of
National Defence is not proceeding as fast as initially expected following
cautionary warnings that such moves could antagonise important elements within
the military. Nevertheless revelations of plunder and malfeasance by senior
military officers and the subsequent arrest of several senior military figures
has reduced the ability of the military to resist change where it can be shown
to lead to greater transparency.
Against domestic terrorism, the administration did a pretty good job against
terrorists, particularly the Muslim extremist group Abu Sayyaf. Incidence of
bombings and fighting in the southern regions of Mindanao was minimal in 2004.
The government also re-opened peace negotiations with the Moro Islamic
Liberation Front. Peace talks with the communist rebel group National Democratic
Front were less successful.
Crime incidents in the country fell 8 per cent in 2004. In particular, police
cases of kidnap-for-ransom went down by 70 per cent to 28 in 2004 from 77 in
2003. This helped improve the image of the Philippines as a tourist destination.
What would cause political divisiveness in 2005 is the government's renewed
attempt to amend the Constitution to facilitate the shift in the form of
government from presidential to parliamentary. This hot political issue would
persist in the minds of the opposition, wishing to take advantage of the
president's dipping popularity rating.
However, any attempt to destabilize the political situation would not draw
support from the public at this point. A more serious threat is the
deterioration of public finances and the high consumer prices which could be
used as grounds to unseat any president.
A common prescription is that the government should accelerate the pace of
social and economic reforms. The president should be cautioned against making
promises that she can't keep, particularly those pertaining to food, jobs and
Overall, the situation is expected to improve in 2005, compared to 2004 and the
preceding years. However, with the expected increase in tourist arrivals,
foreigners are advised to observe caution and restraint in public areas.
The projected slowdown in demand for electronics and the volatile oil prices
in the world market will exert downward pressures on the country's GDP growth in
2005. Domestic demand, however, is expected to support economic activities in
the short term and may offset a two-percent cutback in exports growth.
Although the head of the National Economic and Development Authority is
optimistic that the GDP would match its 6 per cent growth last year, economists
point to a list of internal and external threats to growth this year.
Among the external threats are the high oil prices that impact on inflation and
the expected slump in global demand. On the internal side, the threats are the
government's weak fiscal situation and the El Nino dry spell that affects
For one, the Manila-based multilateral lender Asian Development Bank (ADB) said
the winding down of the global electronics cycle, weaker growth in industrial
countries, and China's economic slowdown would result in lower economic growth
for Asia in 2005.
Economists also predicted that the country's semiconductor exports, which
account for more than half of the total, would not be able to sustain its
double-digit growth in the past.
Even economic managers predicted that the growth of the export sector would slow
from around 10 per cent in 2004 to 8.2 per cent in 2005, due to the slowdown in
demand from industrial countries and the removal of quotas in the garments
The abolition of the global quota system under the 30-year-old Multi Fiber
Agreement (MFA) in January is expected to expose more than 100,000 garments
workers in the Philippines to the stiff competition from China, where wages are
Optimistic is the word for the government's growth target for 2005 at 5.3 to 6.3
per cent. The ADB and the World Bank have more conservative forecasts, at 4.7
per cent and 4.5 per cent, respectively. At the most, the GDP would grow by 5.0
per cent and the gross national product (GNP) by 5.5 per cent in 2005.
The growth of the dollar remittances sent home by overseas Filipino workers,
worth around US$10 billion annually, is not expected to reach double-digits this
Economists from the University of Asia and the Pacific predicted that personal
consumption expenditure will grow by only 4.5 per cent in 2005; government
consumption, 0.5 per cent; and capital formation, 9 per cent.
Agriculture is seen growing 3.5 per cent in 2005; industry, 4.8 per cent; and
services, 6.2 per cent. Services will continue to carry the bulk of economic
growth in 2005 as investments in telecommunication and information technology
Mining and quarrying is expected to grow by 15 per cent in 2005, following the
Supreme Court ruling that allowed foreign investors into the local sector.
Inflation rate is forecast to remain high at 7 per cent in the first quarter but
would settle at an average of 5.5 to 6 per cent in 2005 while the bellwether
91-day Treasury bill rate would breach 8 per cent this year. The peso is seen
trading at 57 to the US dollar late in the year.
With the passage of the Sin Tax bill, the government hopes to bring its budget
deficit to only 3.6 per cent of the GDP in 2005, down from 3.8 per cent in 2004.
Multilateral lenders pointed out that addressing the fiscal problem is essential
to achieving a sustained and accelerated pace of growth for the Philippines.
The government has admitted that "if the fiscal problem is not addressed,
growth will be considerably lower on account of a severe erosion of investor
confidence. This could lead eventually to balance of payment difficulties, as
well as to deep cuts in government spending if the government is forced to
continue with its target to achieve fiscal balance by 2010 but in the face of
lower than expected revenue growth.
The current account balance is seen at US$1.134 billion or 1.2 per cent of GDP
in 2005 and the gross international reserves stand at present at US$16 billion.
The information and communication technology sector as well as outsourcing
operations (and particularly business process outsourcing) is expected to drive
much of the growth in services this year. This sector includes contact centres,
medical and legal transcription, animation, backroom operations, accounting and
Top performers in the past two years are expected to remain buoyant in 2005.
These include beverage, logistics, education, food services, IT services,
pharmaceutical, telecommunication, media, packaging, parts services and
electronics. In particular, it is the back office services that create the
highest value-added jobs and which therefore the government is seeking to
foster. In this regard, the Philippines can take comfort from the fact that
recent surveys show that the Philippines is more competitive as an outsourcing
destination than India and that the competitive gap is widening.
In its new investment priority plan, the government wants to offer a more
competitive incentives package to the following sectors: IT-related industries,
BPO/contact centres, tourism, fashion garment, jewellery, medical
services/healthcare/wellness, electronics, automotive, agribusiness/mariculture,
Local economists have identified the new sunrise industries for 2005 as health,
wellness and beauty services for tourists; retirement homes; and even fashion
design. All of these of course produce jobs but have minimal impact on
investment and asset creation.
Then of course there is the revitalized mining sector to take into account. The
opening up of the mining industry once again to foreign investment after the
uncertainty of recent years, has the potential to change the entire growth
paradigm of the Philippines. The government believes that the Philippines can
absorb up to US$2 billion a year into this sector alone with much of the
investment going into remote provincial regions thereby acting as a major growth
incentive throughout the country as a whole and providing jobs in remote areas.
Furthermore experience has shown that investment into mining has a relatively
high multiplier effect through the economy as a whole.
Even without taking the mining industry into account (with projects admittedly
having a relatively long gestation period, new foreign investments are seen to
grow at a single-digit level, ranging from 6.6 to 6.8 per cent in 2005, even
without any major reforms. At present, the Philippines maintains barriers to
foreign investment in many sectors but these barriers are being dismantled and
that is a major unsung achievement of the administration. In fact, President
Arroyo has recently signed Executive Order No. 389 that blocks or restricts the
entry of foreign investments in 35 major sectors.
The Sixth Regular Foreign Investment Negative List (FINL) under Republic Act No.
7042, otherwise known as the Foreign Investment Act of 1991, does not allow any
foreign equity at in mass media except recording, in the practice of any
profession (including law and accountancy), retail trade enterprises with paid
up capital of less than US$2.5 million, cooperatives, private security agencies,
small scale mining, utilisation of marine resources, operation of cockpits,
manufacture of nuclear, biological, chemical, and radiological weapons and
anti-personnel mines, and the manufacture of firecrackers and pyrotechnic
In its 2005 Index of Economic Freedom, the Heritage Foundation rated the
Philippines as a mostly unfree economy, ranking 90th among 161 countries. It
said among the drawbacks in investing in the Philippines are worsening social
and political stability, inadequate infrastructure, antiquated labour
legislation, high tax rates and bureaucratic corruption.
The ADB has a different concern: the challenge for the Philippines and the rest
of East Asia, according to the ADB, is to sustain robust growth at a time when
US interest rates and domestic inflation rates are on an upward path.
"Against this emerging global and regional economic backdrop, an
appropriate policy response should have three key components: tighter fiscal and
monetary policies, greater exchange rate flexibility, and structural reforms to
create an environment conducive for a sustained increase in domestic demand,
especially private investment in countries where it has been subdued since
1997," the bank said.