Philippine Business Magazine: Volume 8 No.1 - Forecast
Looking Up
A new administration brings with it upward adjustments in growth forecasts
By Michael B. Mundo

What the audience wanted to hear was what the new administration plans to do in the immediate short-term in the economic front. But instead the new Socioeconomic Planning Secretary and NEDA Director-General Dante Canlas presented the broader goals of the Arroyo Administration - sustained income growth, full employment, stable prices, sound balance of payments, and equitable income distribution. More importantly, he reiterated, before an early February meeting among representatives of major business associations, the President's commitment to eliminate poverty within the decade. Poverty incidence has worsened to 40.6% in 1998 from 39.9% in 1991.

New Targets
In terms of numbers, the government's new macroeconomic forecast for 2001 show that GDP will grow by 3.8% to 4.3%, while GNP will also expand by 4.0% to 4.4%. NEDA believes that renewed investor confidence, lower world interest rates, and more stable world oil prices will raise industry growth to 4.0% to 4.5% and services growth to 4.2% to 4.6%. Agriculture growth, however, is expected to slow down to 2.4%-3.0% due to the El Niño phenomenon.

Looking back, the Dr. Canlas' recent estimates make a pessimist out of the previous NEDA Chief, Felipe Medalla. The latter's GDP growth projection was 3.0%-3.5% and GNP growth target was 3.2%-3.7%. Prior to the jueteng-gate crisis in the last quarter of 2000, government macroeconomic managers expected GDP growth of 4.0%-5.0% and GNP rise of 4.5%-5.5%.

Under the govern-ment's original Medium-Term Development Plan, GNP was expected to grow by 4.6%-5.1% and GDP by 3.9%-4.6%. Among ASEAN member eco-nomies, the Philippines, with a per capita income of US$1,020 as of 1999, stands behind Thailand, with an income per head of US$1,960, but paces ahead of Indonesia, with an income of US$580 per person.

Under the Arroyo Administration, inflation is seen to reach 6.0%-7.0% this year. "We don't want a noisy price system," Dr. Canlas said, but he is worried, however, that high world oil prices may threaten price stability. For his part, Bangko Sentral Governor Rafael Buenaventura assured businessmen of price stability. Inflation averaged 4.4% in 2000 and 6.7% in 1999 from 9.8% in 1998. Earlier official inflation targets for 2001 ranged from 5.5%-6.0% to 6.5%-7.5%.

Concerns
More crucial to growth than the inflation rate is interest rate, whose bellwether rate currently stands at around 11%. Sufficient liquidity will give monetary authorities room for more interest rate cuts, according to Buenaventura. But the main problem is containing the fiscal deficit which reached P136.1 billion last year. The new set of economic managers promised that tax collection efficiency will be improved together with tax enhancement measures. The tax structure will also be revisited to reduce costs of doing business. Administrative regulations will be strictly enforced, especially sanctions on smuggling.

Other worries challenge the new government. Unemployment, for one, reached 11.2% last year. According to Dr. Canlas, this translates to four million members of the workforce without job opportunities.

Another area of concern is the weak exchange rate. The peso-dollar exchange rate depreciated sharply by 11.6% last year, by 27.9% in 1998, and by 11.1% in 1997. In 1999, the exchange rate appreciated by 4.6%.

To address these challenges, the national government will continue to pursue market-reliant policies of deregulation, liberalization, and privatization. Good governance and institutional reforms will also be carried out. Decentralized local government services will not be devolved back to the national government to ease its fiscal burden.

Tactics
Government's growth strategies rest on several tactics. Macroeconomic stability will depend on containing the fiscal deficit by reducing public spending (except on core services such as nutrition, basic education, and social overhead capital). It will also hinge on the capacity of the independent Bangko Sentral to create a stable monetary policy environment, implement a flexible exchange rate policy, as well as ensure mobility of capital flows.

Long-run growth with equity rests on agricultural modernization. Raising agricultural productivity and income also seek to address poverty in the countryside. Industry and services will be supported by policies that will enhance international competitiveness, including accompanying tariff reforms. Lifelong investments will have to made in education and training. Research and development in the private sector will have to step up.

Social safety nets extending outside private companies include social security and health insurance coverage. Targeted poverty alleviation programs feature convergent social services (basic education, health, social work, and community participation) such as those found in agrarian reform communities.

Organizing For Progress
In order to move faster, government has organized itself better. Thus far, the Arroyo Administration has reactivated the LEDAC (Legislative-Executive Development Advisory Council) to pursue priority reform legislation in Congress. Among these pieces are the 2001 General Appropriations Act, amendments to the New Central Bank Act and bank secrecy, and the power sector reform law. Also arranged by the NEDA, the Investment Coordination Committee has moved quickly to address absorptive capacity issues on foreign-assisted projects. Among government economic agencies, the Development Budget Coordination Committee is reviewing the fiscal policy framework and targets for the next three years, with the support of Bangko Sentral.

Cabinet departments immediately mapped out measures on the expected return of the El Niño phenomenon, Mayon Volcano evacuation, and disaster control. Apart from these emergency measures, other immediate concerns the government is focusing on include the following: coconut levy issue is under review; the Medium-Term Development Plan is being updated; IT and tourism clusters are being prioritized; multisectoral consultations and dialogues with the poor are being conducted; and an employment summit will soon be hosted by the Social Security System.