A Poll Struck Economy

Will the May polls derail the economy’s momentum this year?

by Michael B. Mundo

A survey of Philippine GDP forecasts among 38 institutions this year yields an average growth rate of 4.4 percent – exactly the same as what Makati Business Club projected in December 2003. The result means the negative impact of the May elections on the rate of economic expansion is considered minimal, coming from a 4.5 percent pace in 2003.

For the government, however, the political uncertainty does not affect the growth momentum of the economy since it targets a low-end growth rate of 4.9 percent. While the most pessimistic outlook on the Philippines (2.8 percent GDP growth rate) came from a CLSA analyst based abroad, the most optimistic prospects among private forecasts came from an analyst firmly rooted here in the country (5.3 percent GDP growth rate). The most frequent GDP growth forecasts on the low and high sides are 4.2 (reflecting slowdown in investments) and 4.9 percent (induced by campaign spending), respectively.

In 2003, despite the SARS outbreak, the war in Iraq, a mild El Niño, and the Oakwood coup attempt, the growth of the domestic economy managed to accelerate slightly to 4.5 from 4.4 percent in 2002. This was within the government’s GDP target of 4.2 to 5.2 percent but above average expectations of 4.1 percent.

Although not all institutions in the survey have forecasts on consumer prices, inflation rate projections averaged at 3.9 percent, a shade below the government’s four to five percent target, but still higher than the record 3.1 percent rate in the past two years. In 2003, the survey of forecasts was even pessimistic, with a higher average inflation expectation of 4.7 percent.

Fixed targets

The government’s economic managers are confident the economy’s strong showing in 2003 bolsters chances of meeting their higher growth targets of 4.9 to 5.8 percent for GDP and 5.2 to six percent for GNP in 2004.

With strong consumer demand for telecommunications, sustained growth in IT-related businesses, and improvements in the transport sector “barring the absence of major shocks that will affect the exchange rate and cost of borrowing,” Socio-economic Planning Secretary Romulo Neri projects the services sector to lead output growth at 5.5 to 6.3 percent from 5.9 percent.

Propelled by strong manufacturing and construction subsectors, the industrial sector is targeted to expand at five to 5.8 percent from last year’s three percent. On the other hand, normal weather conditions, sustained public spending through the Agriculture and Fisheries Modernization Act, and the opening of new export markets will push the combined agriculture, fishery, and forestry sectors’ growth to 3.7 to 4.7 percent from 3.9 percent.

By demand, the government banks on strong consumer spending on account of the elections in the first semester, higher farm income, stable prices, and “better employment conditions.” Furthermore, exports are projected to grow ten percent as growth in world output picks up; demand for semiconductors recover; and income from IT-related businesses, call centers, and business process outsourcing increase. Aside from exports, the Department of Trade and Industry also expects investments to lead economic growth this year.

In December 2003, however, the Bangko Sentral expressed concern over the higher macroeconomic target considering the expected slowdown in foreign direct investments until after the election in May. BSP’s projection for 2004 GDP only ranged from 4.5 to 5.3 percent. After reviewing these targets in January 2004, the inter-agency Development Budget Coordination Committee decided to retain the official targets, which are consistent with the medium-term development plan.

According to the National Economic and Development Authority, growth prospects in 2004 depend on the stability of the macroeconomic environment. Consumer prices are projected to rise to four to five percent from last year’s 3.1 percent. Bangko Sentral ng Pilipinas Governor Rafael Buenaventura points to higher wages and oil prices. The peso-dollar exchange rate is expected to depreciate to an average of P54 to P56/US$1 from P54.2/US$1 in 2003. BSP assumes a ten percent export growth, an 11 percent import growth, a return of foreign direct investments after the polls, and a five percent rise in overseas worker remittances. Also, the benchmark Dubai crude price is projected to rise to an average of US$29.26 per barrel from US$26.79. The interest rate bellwether 91-day T-bill rate is also assumed to pick up to an average of 7.5 to 8.5 percent from six percent.

May and Beyond

Revised GDP growth projections for the Philippines by the International Monetary Fund (IMF), the United Nations Department of Economic and Social Affairs, and the World Bank now converge at 4.2 percent. They previously expected Philippine GDP to grow at four percent, 5.4 and 4.5 percent, respectively.

The IMF believes a pick up in growth this year is possible “to the extent that the Philippine economy benefits from the current upturn in the global economy.” Masahiko Takeda, head of the IMF mission to the country, hopes export growth to “accelerate further.” The Fund sees the country’s medium-term prospects as tied to reforms in the fiscal, power, and banking sectors.

On the other hand, the United Nations Economic and Social Commission for Asia and the Pacific, as well as the Asian Development Bank (ADB) have kept their GDP growth forecasts for the Philippines since last year at 4.9 and 4.5 percent, respectively. ADB’s outlook banks on a healthy electronics export performance, strong remittances behind consumption, and recovery in agriculture after a year of drought and typhoons.

ADB’s Asia Economic Monitor last December 2003, however, notes the outlook of Consensus Economics survey at four percent. On the downside, however, “politics will take center stage during the first half of 2004.” Therefore, “policies concerning the economy and restructuring might have to take a back seat until the new Government is in place.” Furthermore, “investors may take a wait-and-see attitude until the outcome of the elections is known.” The report also prescribes credit expansion so that the economy can “move to a higher growth path.”

In December 2003, John Stuermer of the New York-based Bear Stearns also forecast a 4.5 percent GDP growth for the Philippines. His Asia Outlook, however, disputes press and rating agency commentary characterizing the May general elections “as a risk factor.” According to his report, “there are many negative factors in the Philippines… but the full functioning of democratic rule is not one of them.”

The Economist Intelligence Unit, in its Country Briefings Philippines on 11 February 2004, likewise projects a steady 4.5 percent GDP growth since “export growth will offset a small slowdown in the pace of private consumption in 2004.” With regards to economic policy, “the outcome of the election will be important in determining whether the reform programme remains on track and the Philippines retains international confidence.”

According to James Hookway in the Far Eastern Economic Review’s Asian Economic Outlook published last 29 January 2004, “the government may lose much of its fiscal credibility that it gained last year” with the coming elections in May. Analysts fear President Gloria Macapagal Arroyo’s re-election bid will step up public spending. On the other hand, international creditors are worried over Fernando Poe, with “no political – let alone economic – experience.” Therefore, it would be “much more difficult” to reschedule the country’s foreign debt.

Despite election-related concerns, however, two institutions have recently upgraded their economic prospects for the Philippines. On the conservative side, Consensus Economics revised its GDP growth forecast to 4.2 percent from four percent. On the bullish side, former Socio-economic Planning Secretary Cielito Habito confirmed that the high-end GDP growth projection of the Ateneo Macroeconomic Forecasting Model has been adjusted upwards to 5.2 percent from five percent.