Beating Foreign
Expectation

he domestic economy actually expanded 4.7 percent last year (instead of the earlier reported 4.5 percent), beating average forecasts of international and regional institutions at 4.2 percent. For 2004, they still forecast the country’s economy to sail at the same pace as last year’s 4.7 percent, picking up speed to 4.9 percent by 2005.
Although exports have not increased as fast as its neighbors’ in the region, Philippine GDP growth soared to 6.4 percent in the first quarter – thanks to a record high agricultural performance and robust consumer spending. This strong showing, however, may be weakened after the May national elections and a looming power shortfall. Furthermore, this pace of growth may be threatened by rising domestic inflation and interest rates in the following quarters, fuelled by crude oil prices reaching 21-year highs abroad and an expected rise by the U.S. Federal Reserve of its key interest rate to manage inflation. Nevertheless, the country’s economic managers have retained their GDP growth forecast at 4.9 to 5.8 percent for this year.

PECC

Last 1 June, the Pacific Economic Cooperation Council launched its regional economic forecast. In Pacific Economic Outlook (PEO) 2004-05, University of the Philippines economist Dr. Cayetano Paderanga Jr. projects Philippine GDP to grow by 4.3 percent and 4.8 percent in 2004 and 2005, respectively; inflation rate to move upwards to 4.5 percent and five percent; exports to expand by four percent and 6.5 percent; imports to increase by ten percent for both years; and the current account deficit to remain at 2.5 percent of GDP. In contrast, PEO economies are expected to grow by 4.7 percent in 2004 and slow down to 4.4 percent in 2005. Growth will speed up in 2004 relative to 2003 “in all cases except China, New Zealand, Peru, and the Philippines.”

In the same report, Christopher Findlay of the Australian National University likewise calls to policy shifts with elections among PEO economies – the United States, Indonesia, Australia, and the Philippines. Other risks in his regional overview include “the response in the region to the rising US current account deficit,” “the world commodity markets, especially energy markets,” and “the China story.”

ADB

Last 28 April, the Manila-based Asian Development Bank presented brighter prospects for the Philippine economy in its Asian Development Outlook (ADO) 2004. The bank upgraded its GDP growth projection for 2004 to five percent from 4.5 percent, backed by strong consumer spending, particularly in relation to the elections.

The use of hybrid rice and better weather is expected to push agriculture growth to 3.7 to 4.7 percent. Improved global demand for electronics will likely push exports growth to eight percent. Imports, on the other hand, can grow to ten percent. Along with strong manufacturing and construction, industry is projected to expand to 3.6 to 4.8 percent. The services sector is seen to grow 5.5 to 6.3 percent. The bank projects Philippine inflation to rise to four to five percent and unemployment rate to go up to 11 percent for 2004.

The regional development finance institution assumes a smoothtransition to a new government and the absence of external shocks. ADO identifies uncertainties that may impede growth – “the recovery of the US economy, the oil price outlook, the extent of peso depreciation, the budget deficit, and the outcome of the elections.” The non-passage of a revenue measure indexing excise tax on distilled spirits to inflation and the reenactment of the 2003 budget already does not send “any message of confidence to the market.” The fiscal deficit should be capped at 4.2% of GDP.

IMF

The International Monetary Fund’s 21 April 2004 World Economic Outlook (WEO) slightly raised economic outlook for the Philippines to 4.5 percent from 4.25 percent for 2004. WEO, however, projects the economy to slow down to 4.2 percent in 2005. Consumer prices are expected to increase to 3.9 percent and 4.0 percent, respectively, in 2004 and 2005 from 3.1 percent in 2003. The country’s current account balance, on the other hand, is expected to narrow to 1.6 percent and 0.8 percent of GDP, respectively, in 2004 and 2005 from 2.1 percent in 2003.

Since “vulnerabilities remain,” it is important for the Philippines, the Fund report warns, “to stay the fiscal course” and “to tighten monetary policy should exchange rate depreciation pose a threat to the attainment of the inflation target.” WEO points to priorities in the direction of raising revenues, restructuring the power sector, strengthening the banking system, and improving the business environment. The Fund expects the country to cap the fiscal deficit at 4.5 percent of GDP in 2004 from 4.9 percent of GDP in 2003.

Philippine GDP growth soared to 6.4 percent in the first quarter of the year largely due to a record high agricultural performance

This June, a team from Washington arrives in Manila to review the country’s economic targets over the medium-term in the light of a post-program monitoring scheme with the Fund. Last 5 March, the IMF Executive Board issued “a seal of good housekeeping” for the country’s macroeconomic, fiscal, monetary and external accounts performance in 2003. A 30 March Public Information Notice on Article IV consultation with the Philippines likewise reveals concern among Fund directors over the public debt, compliance with the recommendations of the Financial Action Task Force against money laundering, and over trade protectionist pressure.

World Bank

The World Bank’s East Asia Update last 19 April gave a grim outlook on the Philippine economy. The bank projects GDP growth to slow down to 4.2 percent and 4.1 percent in 2004 and 2005, respectively. The number of poor people (or those earning US$2 and below a day), however, are expected to drop continuously to 33.9 million and 33.4 million in 2004 and 2005 from 35.0 million in 2003. The bank notes “portfolio inflows are also estimated to have picked up in other main East Asian countries, with the exception of the Philippines.” While spreads on emerging market debt have fallen in East Asia, the Philippines has been left behind, “reflecting the slow pace of improvement in the country’s fiscal problems.”

Furthermore, an expected slowdown in China brings short-term risks to the region since middle income countries in Southeast Asia – Malaysia, Philippines and Thailand – have improved their competitiveness – as gauged by the value of Revealed Comparative Advantage greater than one – in terms of China’s transport and machinery equipment imports.

UN ESCAP

Last March, the United Nations Economic and Social Commission for Asia and the Pacific released the Economic and Social Survey of Asia and the Pacific 2004. For the Philippines, unaffected by the avian influenza early in 2004, the report forecasts, “the current expansion is likely to be sustained in 2004 if inflation and interest rates remain low and the external environment strengthens.” However, the “continuing political uncertainty and recent downgrade in ratings will tend to increase costs, making the task of fiscal consolidation harder.” For the government to attain its GDP growth target, “a strong reversal of the falling business confidence in the Philippines” is required.

UN ESCAP’s own GDP growth forecast for the Philippines from 2004 to 2006 are 5.4 percent, 5.8 percent, and 6.3 percent, respectively. The country’s inflation rate is expected to rise to 4.5 percent in 2004, and then dip to four percent and 3.5 percent in 2005 and 2006, respectively.

UN DESA

Last 14-16 April, Project LINK of the United Nations Department of Economic and Social Affairs estimated a GDP growth pace of 4.9 percent and 5.3 percent for 2004 and 2005 for the Philippines.

Just last January, its economic growth outlook for the country this year was 4.25 percent, with inflation climbing to an average of 3.75 percent. Moreover, the World Economic Situation and Prospects 2004 projected a boost in domestic demand from tourist inflows and remittances from China and from “high rural income due to firmer agricultural prices and rural support programmes.” Only the Philippines and Indonesia, however, did not turn expansionary in fiscal policy to support domestic demand like what most East Asian economies did.