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Key Economic Data 
  2003 2002 2001 Ranking(2003)
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: 025 - (30/01/06)

The end-of-year holiday season provided a welcome break from the rampant politicking so evident in the latter months of 2005 but the respite proved to be sort-lived. Yet, President Arroyo has emerged in a stronger position politically by the failure of her opponents either to unseat her or to have her removed. Yet, this strength has limitations and whether the country as a whole is stronger as a result of the turmoil of 2005 is a moot point. The answer is that it probably is not. President Arroyo has undoubtedly lost much of her moral suasion and freedom to manoeuvre. That she is still able to command support and allegiance is, increasingly, a reflection of the horse-trading that is taking place - especially in government appointments. 
As January progresses there are talks of fresh restiveness within the military and especially relating to the politicisation of the senior echelons where loyalty to the president rather than adherence to promotion by merit is claimed to be taking its toll on officers and enlisted men alike. Such talk is unlikely to lead to any precipitous action, but it is unsettling nonetheless. There are rumblings too that suggest that the free hand granted to those key economic officials who came into government to replace those who resigned in July last year is being pared back. Will we see more resignations this year due to political meddling in key portfolios? Only time will tell.
President Arroyo has set her agenda for this year as embracing three key areas (1) Constitutional reform; (2) bringing peace to Mindanao and (3) reducing poverty. It is likely that there will be some forward movement this year. Evidently, the government believes that it has already done all it can, legislatively speaking, to restore health to the country. But progress on any of these issues presupposes that the economy will continue to move forward. In this regard it is reasonable to expect that-all other things being equal-2006 may be a slightly better year for the Philippines than 2005. If it pans out as anticipated then President Arroyo will have a much needed respite that should see some recovery of her tarnished image.
Leaving aside for a moment, the external threats to economic growth (except to note that the general consensus appears to be that in global terms, there will continue to be a gradual slowing of the world economy-and in particular US consumer spending-and this will have repercussions for export growth throughout Southeast Asia) and looking at the key domestic factors that will drive growth, we see both positive and negative factors at work although overall we remain optimistic that this year may well be better than last.

A continuance of population-driven growth
Economic growth in 2006 will remain largely population driven, which means remittances and consumer spending will continue to drive business activities. With the domestic economy still producing far fewer jobs than required to soak up those entering the workforce, many Filipinos have little choice but to seek employment overseas. Even so, unemployment remains unacceptably high throughout the Philippines and in some parts, unemployment and underemployment is extreme.
At present, some eight million Filipinos are reportedly living and working in other countries. In the local job market, some 2.62 million adult Filipinos or 7.4 percent of the labour force (ILO definition) are unemployed while another 7 million or 20 percent felt they were underemployed, as of October 2005. These numbers probably understate the true situation in the country - especially if unemployment is taken to mean exchange of labour in return for a liveable wage that would lift an individual and his/her dependents above the poverty line. Clearly that is not the case. More people are coming to regard themselves as "poor."
Aside from the absolute number of Filipinos seeking employment overseas, a structural shift is underway. Whereas in previous years, land-based deployment (as distinct from mariners) was concentrated in semi-skilled areas of factory processors and domestic helpers, increasingly professionals are seeking jobs overseas in such fields as nursing and health care, computer and IT professionals as well as teachers. Already this is having an impact on service delivery in a number of key areas of the economy but, significantly, in the development of social infrastructure.
According to the Commission on Population, the number of Filipinos is expected to increase by 1.7 million - around 2 percent to 86.7 million in 2006 from 85 million last year. At this rate of growth the population of the Philippines has doubled in just under 30 years -the population now is twice that of 1977.
While the latest labour force survey result is encouraging in terms of suggesting that domestic employment growth is increasing more rapidly than the population as a whole it is worrisome that employment in the industry sector has barely moved. Farm output last year grew well below the 3.3 percent growth recorded in agricultural employment suggesting a decline in real incomes. The services sector (which added 1.13 million new jobs) also includes those employed in the public service at national, provincial and local levels and which contributes only marginally to productivity. This sector also includes those engaged in small business including itinerant vendors. (Employment in the BPO sector is measured in the tens of thousands, not in the millions.)
With the additional revenue made available to government this year, a fund of PhP1 billion (around US$19 million at present exchange rates) has been set aside for promoting the small business sector through providing micro financing opportunities. While this is an encouraging development, the underlying cause of rural poverty (in particular) is not really being addressed - that of providing farmers with clear asset titles against which they could borrow from commercial lenders to establish business enterprises or upgrade their farm output. Land reform has been the catalyst of economic emancipation in much of Southeast and East Asia, but is not happening in the Philippines on other than a token scale at the present time.

The growth drivers
In a nutshell, the factors driving the economy forward in the year ahead are likely to be the same as those evident in previous years. It will be consumption-led growth fuelled by remittances rather than the investment-led growth that the country so desperately needs if it is to break out of the poverty trap.
Among the positive factors that will influence economic activities this year are the expected increase in earnings abroad, the rise in tourist arrivals, the expansion of IT-enabled services, new investments in mining and other sectors, the recovery of the construction sector, and the positive sentiments emanating from fiscal reforms. The fiscal deficit is expected to ease to PhP125 billion from around PhP160 billion or 2.9 percent of the GDP in 2005.
With the implementation of a two-percentage point increase in the expanded value added tax (EVAT) rate from 10 percent to 12 percent by February, inflation is expected to remain high at 7 to 8 percent in the short term. However the VAT increase, while not particularly welcome, appears to have been accepted by business as a necessary price to pay for moving the economy forward. 
High savings of OFW families, as hinted by the rising growth rates in financial services in 2005, will augur well for the growth in consumption and investment this year. Among the sectors that can benefit from this are real estate, automotive industry, telecommunications, logistics, travel, food manufacturing, transportation, education, healthcare, and the small business sector generally. 
Banks are expected to keep high returns, with a decline in their non-performing loans and the transformation of their non-performing assets. An upgrade of the country's sovereign debt rating, while not yet an immediate likelihood, is at least on the horizon and should provide added incentive for the administration to stay the course.
The Philippine peso will continue to get a boost from strong dollar inflows this year. While a strong peso has been helping the country in its foreign loan payments, there are signs that it is hurting the export sector. Officially, exports are expected to grow by 8 to 10 percent in 2006, supported by increased shipments to China. However, at this time last year there was a similar expectation of an increase of around 10 percent. Frankly, at this stage we do not see it happening-certainly not from the traditional mainstay of the export sector-that of electronics. We expect the electronics sector to have another tough year as global consumer spending slows.
Local stocks, as measured by the Phisix, could well climb toward the 2500 psychological mark, as selected companies continue to register strong growth in net income (The record high was 3300 prior to the 1997 Asian financial crunch). The planned initial public offerings (IPOs) of large companies such as broadcast firm GMA Network Inc., and energy company First Generations Holdings are expected to generate fresh interest in the local bourse. Foreign portfolio investments are expected to keep coming in and at an increasing rate, although never underestimate the ability of politicians to throw a spanner in the works. A new political impasse could well interrupt the positive mood pervading the market.

More Investments into mining?
So far, according to the official statistics, foreign mining companies have committed US$350 million in fresh investments into the sector that could, eventually, yield billions of dollars in mineral exports. The private sector-led Chamber of Mines is confident that it can attract up to US$6 billion worth of foreign equity into local mining by 2010. This may again be over-optimistic. While a number of new mining projects are expected to start this year, other projects continue to be on hold pending resolution of disputes at the local level. While national policy is now unequivocally in favour of the development of a world-class minerals industry for the Philippines, some provincial and local government units, with the support of some non-governmental agencies (often foreign funded), continue to thwart efforts to develop international mining projects. Interestingly, in many instances these same NGOs do not oppose small-scale mining which, so they claim, is a traditional livelihood activity. Yet independent research has shown that it is the traditional mining that has caused the bulk of previous environmental degradation in mining areas and which continues to pose the major threat to the environment. 
A further issue complicating the development of further mining activity-and consequent large-scale investment-in the Philippines is the fact that a number of claims that have commercial potential are not moving forward due to excessive demands on the part of those sitting on their claims-some still current, but others that have expired. In fact industry sources claim that while the government last year cancelled some 63 leases, the only ones cancelled were those that had no commercial potential whatsoever. Other leases, with potential but lying dormant have not been cancelled. It seems that at the present time the government lacks the resolve to force the commercial development of many mining areas and, with boom prices not expected to last indefinitely, there is a clear danger that, yet again, the Philippines may "miss the boat" in terms of realising the full potential of this sector.
Leaving aside the mining sector, recent data from the Central Bank and other sources shows that investment pledges into a number of sectors continues to be on the rise. Investments registered with the two largest investment promotion agencies went up by 20 percent to around PhP225 billion in 2005 from PhP186 billion in 2004. In particular, investments registered with the Board of Investments (BOI) reached PhP158 billion in 2005, or up by 16.4 percent from PhP136 billion in 2004 while those registered with the Philippine Economic Zone Authority (PEZA) rose to PhP67 billion from PhP50 billion. Of course, an investment pledge creates no new wealth and no new jobs until that pledge is actualised. Nevertheless, the trend is encouraging. Pledges made in 2005 are expected to bear fruit in 2006 and some represent investment into new export activity which would be welcome. These figures do not include yet planned investments in two other agencies - the Clark Development Corp. and the Subic Bay Metropolitan Authority.

Recovery of the construction sector
Once realized, planned investments are expected to augur well for new private construction activity. The growth of the IT-enabled services sector is already pushing demand for new office space and the construction of purpose-built offices. According to the Business Process Outsourcing Association of the Philippines (BPAP), exports of IT services will grow a further 70 percent to US$3.4 billion in 2006 from US$2 billion in 2005, on the back of expansion plans by new and existing industry players. 
After dropping by 3 percent in the first three quarters of 2005, public construction is also expected to recover somewhat this year, with the release of initial funds for major infrastructure projects such as US$60.23 million for the Subic-Clark-Tarlac Expressway, US$26.32 million for the Southern Tagalog Arterial Road, and US$23.95 million for the expansion of LRT Line 1 within Metro Manila.
The government is set to release US$64.7 million representing 20 percent of the budget cover for the Agno River Flood Control Projects Phase II-A and by 2007, construction of modern airports in the cities of Iloilo, Bacolod and Tacloban are expected to be in full swing.
Other projects in the pipeline include the PhP25-billion Northrail project, PhP5.2 billion Subic International Port, PhP3.6 billion Manila Third Sewerage Project, and PhP3.4 billion rehabilitation of the Philippine-Japan Friendship Highway (actually, a road network that extends from Northern Luzon all the way to Mindanao).
However, growth within the construction sector will, for the time being, be tempered by conditions in the banking sector which is still in recovery mode as distressed debt washes out of the system. For the time being therefore recovery in construction may be patchy until such time as the banking sector fully recovers and an upgrade in the country's sovereign debt rating allows for better liquidity in the system. 

Growth areas for the economy
In tourism, the government expects to generate US$3 billion in revenues from the arrivals of three million international visitors in 2006, up from US$2.6 billion last year. This is good news for hotels, restaurants, airlines, and other tourism-related businesses. It should also serve to encourage further investment into related entrepreneurial ventures including hire cars, theme parks and such-like.
In telecommunication, the introduction of third-generation (3G) mobile phones services is expected to further increase household spending for services while the deregulation of Voice over Internet Protocol (VoIP) technology will induce further competition into the local market.

The challenges to growth

Domestic Challenges
A mix of domestic and external factors poses risks to higher growth for the Philippine economy in 2006. On the domestic front, while political tensions-at least at current levels-may not affect output production, if taken to extremes such tension could undermine the present positive sentiment towards the local bourse and the currency market. 
Debate on charter change will certainly occur and could be divisive. The principal risk in the charter change debate is not so much to short-term growth but rather to longer-term economic prospects as fresh uncertainties engendered by large-scale Charter change will undoubtedly weigh on the minds of potential investors. It all depends how the debate is handled. Few would argue with the need to overhaul the present Constitution. It has been found wanting in a number of important areas. But the proposal to amend the Constitution in a way that changes the system of government from a unitary and presidential model to that of a parliamentary and federal system is no amendment at all. Rather it is a complete abrogation of the present Charter and one that will take the entire country into uncharted waters. Can the Philippines afford the luxury of such debate in the present uncertain climate? We think not. That it will happen anyway, in spite of wise council to the contrary, is almost a certainty.
Increased consumer prices, induced by persistently high crude oil prices and the implementation of (much needed - but inflationary) tax reforms could continue to dampen consumer and business spending, at least in the short term and will make investors more cautious. Rising interest rates, imposed by the Central Bank to curb inflation, could further weigh on corporate finances, even though the Philippines is following a global trend in raising rates.
The challenge for the government is to restore political discipline without threatening the country's democratic principles and to ensure the sustainability of fiscal reforms and economic progress, despite negative public perceptions. In order to achieve this it will be banking on a stable external environment. 

Global factors and risks
On the external front, continued high oil prices will remain a significant factor constraining global economic growth. Yet the slowdown has actually been quite modest. 2004 saw the global economy put in its best performance in a quarter century and a year ago fears were being expressed that the slowdown would be dramatic. This did not happen. While a further modest slowdown is expected this year, the world economy is expected to stabilise in 2007 and 2008. But consumer fatigue is starting to influence US spending patterns and the monetary stimulus given to that economy in recent years is already at an end. The US economy is overdue for a correction. The question is only a matter of "when will it occur" and how deeply will it influence the global economy. 
High energy prices and rising interest rates will continue to exact a toll on domestic demand in the major OECD economies although by historic terms, growth will continue to remain robust. Asia will continue to outperform all other regions. The Economist Intelligence Unit, in its latest forecast, expects world GDP growth to expand at around 4 percent this year (at purchasing power parity rates). This is down from 4.4 percent expected in 2005 but still much stronger than was recorded during most of the last decade.
Locally, the surge in oil prices last year has already resulted in a much higher rate of inflation than was previously forecast. In 2005, consumer price inflation in the Philippines was among the highest in developing Asia. The inflationary effect of higher energy prices plus the application of a 3 percent (effective) minimum VAT has resulted in higher operating costs to the business sector and in many instances margins have been squeezed. The increase in the Value Added tax to 12 percent, expected in early February 2006, will send a further inflationary surge through the economy but, hopefully, it will be a one-time surge after which inflation will start to fall - aided by the stronger peso. The general prognosis is for inflation for the year as a whole to fall to 7 percent or below. With reasonable expectations, the rate of inflation should ease further next year to below 6 percent.
As already noted, a rise in longer-term US interest rates could impact on the future cost of borrowing and suggests that the Philippines needs to put its fiscal house in order as quickly as possible so as to free up resources for much-needed productive investment. In the USA, short-term rates rose last year by 325 basis points, reducing domestic liquidity. There is growing concern that short term paper is out of synch with long term investment. This imbalance has led to an inflated asset market and a correction is overdue. Most immediately this will impact on consumer spending patterns as the ability of consumers to borrow against their fixed assets declines. But the problem goes deeper than this. The US economy is burdened by record trade deficits. The current account deficit is now more than 6 percent of GDP having been driven upward over the past twelve months by higher than expected oil prices and stronger than expected domestic demand. 
The sheer size of the external deficit means that the United States needs to attract over US$800 billion in foreign capital each year just to sustain its economy. That is a huge amount to take out of the global trading system. The answer of course, is to raise US longer term interest rates to support the inflow in the short-term while allowing a gradual depreciation of the dollar over the longer term so that the US can trade its way back to economic health. In the meantime, raising the interest rates further will likely cut headline growth expectations.
For the Philippines, the state of the US economy will complicate efforts to build more rapid export growth. The situation is not much better in other major markets. Europe is expected to do slightly better this year than earlier expected, with several of the major economies starting show signs of improvement. Yet growth in Europe (E12) will remain modest at around 1.7 percent and so far there has been no resurgence of consumer demand such as would bring gains to Filipino exporters. 
In Asia the story is not dissimilar. Japan appears to be on the road to recovery but it will be a slow process. Furthermore tax increases due to be implemented later in 2006 or by early 2007 at the latest will weigh on consumer spending. As a result, growth in the Japanese economy is expected to slow to around 1.3 percent in 2006 and 1.1 percent in 2007 and 2008.
The risk of a sharp slowdown in China has increased although Beijing is still trying to engineer a soft landing for its bloated economy. With more than 100 percent overcapacity in several key sectors and a weakened authority over the provincial-level leaderships, it will be no easy task. Any sudden crash in any one sector could quickly follow through to China's fragile banking sector. This would likely lead to a domino effect on growth throughout the economy. In 2005 the Chinese economy continued to grow at more than 9 percent- a faster rate than many had expected although the general expectation is that if the Central Government can engineer the "soft landing" needed, then we can expect growth to fall to around 8 percent in 2006 and further to around 7.3 percent in 2007.
Again there are implications for the Philippines in these numbers. China is poised to become the country's top export market over the next few years. Last year, Philippine exports to China soared by more than 50 percent, offsetting the decline in shipments to Japan, currently its largest trading partner and elsewhere. Such a growth surge is unlikely to be repeated unless the Philippines can unlock its resource base and once again become a major resource exporter. If it can do so, it will have in China (and in Korea) willing buyers that will allow Philippines exports to make their own "Great Leap Forward."

So what does it all mean?
While the Philippine government is keeping to its economic growth target of 5.7 to 6.3 percent for 2006, local and foreign institutions are forecasting a more modest growth band of 4 to 5 percent. We believe these latter estimates to be more realistic than the official numbers, given the external and domestic factors that could impact to affect economic performance this year. Our own growth forecast of 4 to 5 percent for 2005 turned out to be accurate (although perhaps there was more luck in that than we should probably admit). 
Importantly, the agriculture and fishery sector is expected to return to better growth levels (of 3 to 4 percent) this year, in the expectation that the El Nio-influenced dry spells will not cause as much damage as they have done in recent years. Many areas, especially in Mindanao have been ravaged by drought and consequent crop failure, sometimes reducing whole provinces to poverty.
The industry sector is forecast to grow this year at between 3 to 4 percent, with the expected recovery in construction and a modest increase in mining activity as a number of pre-existing projects become fully commercialised. The best performer is expected to again be the services sector which is most likely to grow at a range of 4.5 to 5.5 percent on the back of the buoyant telecommunication, IT and travel sectors.
The sad fact though is that among Southeast Asian countries, the Philippines may once again lag behind in growth performance, although it is one of the least vulnerable to emergency risks such as bird flu outbreak.
We would also be remiss if we did not take note of the fact that despite the picture of economic health painted by the macro statistics is the fact that the great bulk of the population does not appear so far to have benefited from the improving numbers. Of course, lag effects in the economy are a major factor and there is some hope that with the improving economic fundamentals and a reduction of the debt service payments abroad, resources will be freed up to invest in social infrastructure-particularly in the delivery of quality education, health and nutrition services.
But the truth is that systemic imbalances also play a large role and, for the present, will continue to do so. Far too much revenue continues to be lost to corruption and there are serious doubts as to whether this will improve under a parliamentary system of government. In fact, the key role played by congressional leaders in the selected release of funds to local government units, suggests that the problem could actually get worse until such time as local government units are given greater powers to raise their own revenue or their revenue allocations become a matter of automatic appropriation. At the moment, with the Treasury desperately trying to balance the books and attend to competing needs, nothing is automatic. 
The opportunity to make a clean sweep of the bureaucracy and to introduce a meritocracy throughout the civil service has probably been lost for the foreseeable future. We have already pointed out elsewhere that the ability of the president to hire and fire goes much deeper in the Philippines than in any other Asian country and so far we have not seen anything in the recommendations of the Constitutional Review Commissions that would curtail this power of appointment.
As we head in the new year, there is more reason for optimism than pessimism but it is a conditional optimism tempered by the fact that the Philippines is marching to the beat of the same well-worn drum. 

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