Not much to expect
The domestic economy is expected to expand only at a slightly faster pace in 2004
By Michael B. Mundo

For 2004, MBC Research expects an almost the same GDP growth of 4.4% as inflation and interest rates are pressured to rise.
Agriculture is expected to sustain its recovery after the mild drought in 2003 on account of the growing export demand for agro-products, investment spending on agricultural equipment and machinery, public spending on agricultural modernization, and credit demand. Palay production will expand as government promotes the use of hybrid seeds.

Poultry supply is also expected to recover as corn output returns to normal, boosted by the usage of Bt corn and hybrid seeds. In Luzon, though, the lack of rainfall in the first quarter threatens irrigated crops.

Industry’s growth may be dampened by increasing fuel and power costs as well an unstable power supply. World oil prices may remain high on account of the economic boom in China and recovery in the U.S. In January, Meralco’s provisional P0.12 per kilowatt hour power rate hike will take effect. On the other hand, semiconductor and electronics, the country’s leading export, will continue to bounce back as global demand recovers, particularly from the United States, Japan, Netherlands, China, and Taiwan. In the first semester, the campaign season can stimulate production of food and beverages, paper and paper products, and publishing and printing. The national and local elections will also raise electricity demand in the midst of a dry season. Though weakened, manufacturing businesses can gain headway in competing against imports since the government turned back tariff rates on around 400 items starting 2003. Rising interest rates can hinder growth in private construction.

Services growth is expected to remain steady. Election spending is expected to boost retail trade, transportation, and communication. The transport sector is seen to benefit from previous government initiatives such as the roll-on, roll-off water transport, the expansion of Metro Manila’s rail transport system, the open skies policy for air cargo at the Diosdado Macapagal and Subic International Airports, and the opening of the controversial Ninoy Aquino International Airport III by May. Unless foreign perception on the country’s peace and order situation improves, however, the negative travel advisories will continue to deter tourist travel to the Philippines. In the finance sector, monetary authorities are encouraging mergers and consolidations to strengthen banks, in addition to the Special Purpose Vehicle Act signed in 2003 to encourage them to unload non-performing assets from their loan portfolios.

Although the Financial Action Task Force withheld sanctions on the Philippine banks for loopholes in its amended Anti-Money Laundering Act, such as tax evasion and graft and corruption among predicate crimes, the country has remained in the list of non-cooperative countries and territories. Should legislators fail to address this issue, foreign investments into the country will continue to slow down.

Political uncertainties related to the national and local elections may further delay entry of foreign investments until the second semester. Talks of charter change can even postpone these expectations until the rules on doing business in the country become clear. With the projected slowdown in growth in remittances from abroad, and foreign borrowings to finance the fiscal deficit, the country’s balance of payments and gross international reserves can narrow down below end-2003 levels. While the Philippine economy’s performance continue to be monitored by the International Monetary Fund, unfavorable ratings from foreign agencies may make it more expensive for the country to borrow from abroad.

In view of these, the peso-dollar rate may tend to be volatile and likely breach the historic low of P55.85/US$ recorded last November 2003. The depreciating peso-dollar rate may further put pressure on both inflation and interest rates to go up. Higher fuel costs will trigger calls for transport fare and minimum wage hikes. Due to weak manufacturing, low investments levels, high inflation rates, MBC Research projects the country’s unemployment rate to stay close to the 11.4% in the past two years.

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