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By Arnold S. Tenorio, Business Editor
2007 will likely be remembered as the year when
the Philippine economy turned in its biggest surprise in more than
two decades. In the first nine months, the country’s gross
domestic product (GDP) expanded by a faster-than-expected 7.1
percent.
This expansion reduced the number of jobless
Filipinos as well as those holding jobs but looking for additional
sources of income. In October, the jobless rate slipped to 6.3
percent from 7.3 percent in the same month last year, while the
underemployment rate slid to 18.1 percent from 20.4 percent over the
same period.
With consumer spending traditionally strong in
the Christmas season, the Philippines is likely to experience at
least the same level of economic activity in the fourth quarter.
According to two Bangko Sentral ng Pilipinas (BSP) surveys, business
sentiment in the current quarter remains positive, with enterprises
anticipating the holiday spending spree to lift revenues,
notwithstanding a less bullish consumer.
The National Statistics Coordination Board said
fourth-quarter growth may come in strong, citing its leading
economic indicator, which registered its fastest ascent since the
third quarter of 2002. The National Economic and Development
Authority (NEDA) estimates full-year growth to range from 6.9 to 7.3
percent.
Multilateral lending institutions agree, raising
their forecasts for the first time in years (see table). In a recent
report, the World Bank cited the country’s expansion as the
fastest among middle-income peers.
In the past, similar growth spurts were cut
short by serious balance of payment (BOP) deficits, as the
economy’s rising import requirements and payments for foreign debt
eroded the country’s dollar reserves, generated largely through
government borrowings and meager receipts from the export of cash
crops and minerals, the prices of which suffered from extreme
volatility. This coupled with fiscal deficits characteristic of
developing countries that try to lift their economies through
massive debt-financed public infrastructure spending.
GNP outpaces GDP
Those days of scarce foreign reserves and huge
public debts however are receding. While Philippine export
performance still depends on electronics—comprising at least 60
percent of total goods shipped abroad—a huge diaspora of skilled
Filipinos led to record remittances to families and loved ones back
home, helping the country build up its dollar cache. This is why the
growth in the country’s gross national product, which is a broader
measure of economic performance since it includes Filipinos’
income from abroad, has outpaced GDP.
Consequently, the country’s BOP, which
combines external trade and net financial transactions, has been in
surplus for 34 months already. The country’s dollar reserves are
at a record $32.7 billion at end-November.
The government has trimmed its debt to about 60
percent of GDP while the public sector reverted to a surplus, its
first since the Asian financial crisis struck. It is also reducing
its funding shortfall aided by new tax laws and declining interest
payments, partly due to the remittance-led appreciation of the peso.
In the first 11 months of the year, the
government turned in a revenue surplus of P12.6 billion, putting it
on track to balancing its budget ahead of next year. Wiping out the
fiscal deficit would mean the government would have more funds to
prime the economy.
Largely a consumer story
The Philippines’ recent growth episode has
been largely a consumer story. In the first nine months, personal
consumption expenditure (PCE) grew 5.8 percent and accounted for 70
percent of GDP. This spending has been fueled by the world’s
fourth largest transfer of funds by overseas workers, after China,
Mexico and India.
Considered a fickle source of growth, PCE in the
Philippines however has been sustained by the continued rise of OFW
remittances, which last year grew 19.4 percent to a record $12.76
billion. In the first 10 months this year, remittances have risen by
15.2 percent to $11.9 billion, already surpassing the full-year
growth forecast the BSP set.
Government consumption is contributing as well
to economic expansion as tax laws passed in recent years gave it
more money to spend. In the first three quarters, state spending
grew 10.3 percent, sustaining a recovery from the slump seen after
the Asian crisis when revenues fell alongside economic output.
Nowhere has state spending been more robust than
in the area of infrastructure outlays. This caused overall
investment spending to recover to pre-Asian crisis levels, with
fixed capital formation up 7.1 percent in the first nine months of
the year.
Private construction complemented public
spending, largely due to the sunrise business process outsourcing (BPO)
industry, whose phenomenal growth is taking up office floor space
faster than construction could cope. Also contributing to expansion
is the home-building frenzy among property firms to cater to
cash-rich OFW families.
Business expansion also has fueled the purchase
of durable equipment, which turned the corner this year after
dwelling in negative territory. Foreign direct investments, which
are the kind that creates jobs, have returned to pre-Asian crisis
levels, rising 22.3 percent in the first nine months.
Anxieties over US slowdown
Despite fears of a slowdown in the country’s
biggest market, the United States, exports still managed to grow
albeit below the government goal, with the latest data showing an up
tick of 2.4 percent, way below last year’s 14.1 percent and an
already revised target of eight percent for this year from 11
percent earlier. A rapidly appreciating peso had reduced export
earnings.
In recent years, the Philippines has benefited
from the decoupling trend, wherein Asian economies survive a
downturn in the US due to brisk intra-regional trade. Trade with the
world’s fastest growing economy, China, for example, has risen by
nearly 30 percent, as the mainland is now the Philippines’
fourth-biggest market next to Japan.
The slowdown in exports is mirrored in the weak
performance of manufacturing, which inched up by just 3.6 percent in
the first three quarters, slowing from 4.5 percent the previous
year. Even though manufacturing comprised the bulk of industry, this
sector still managed to grow by 6.8 percent.
Leading this growth is mining and quarrying,
which ended its contraction to surge by 24.2 percent so far this
year. The huge interest in mining has awakened many listed companies
from decades-long slumber.
The positive outlook for this subsector can be
seen from the multitude of foreign tie-ups and supply deals struck
left and right, as companies try to fill the huge appetite for
minerals by developing countries like China. Recently, NiHAO Mineral
Resources International Inc. signed a long-term contract with a unit
of the world’s biggest miner, BHP Billiton.
Another subsector witnessing robust growth is
construction due to the phenomenal rise of the BPO industry and the
recovery in public spending on infrastructure. Growth for the
subsector so far has averaged 19.3 percent. Consultancy firm
Colliers International sees office space supply barely catching up
with demand. This explains the year-to-date 26-percent rise in
premium grade rentals so far this year.
Services half of GDP
Even as industry turned in decent growth, the
Philippine story remains pretty much about services, which accounted
for at nearly half of GDP and expanded by 8.2 percent.
The trade subsector, comprising 15 percent of
GDP, led growth, a reflection of the largely consumer-driven
economy. This can be gleaned from the rise of more malls, with
industry leader SM putting up additional shopping centers in areas
outside Metro Manila. With retail revenues of P65.2 billion, the
group accounted for nearly 40 percent of the subsector’s total
income.
Transportation, communication and storage proved
resilient, as telecom companies posted double-digit growth, defying
forecasts of a slowdown premised on the local cell-phone market’s
supposed saturation. In a survey, AC Nielsen said that 45 percent of
Filipinos polled including OFW beneficiaries would buy a new phone
in the coming months.
But the telecom industry’s growth was also due
to the strength of its nonvoice business, as industry leader PLDT
said half of its revenues were due to this segment of its
operations. It sees this business, which caters to the growing
number of BPOs and call centers, exceeding its revenue contribution
by more than half in the coming years.
Given the bullish outlook for this segment,
telcos are expanding their capacity in broadband and similar
technologies. Again, PLDT has invested in a multinational effort to
build another international backbone in anticipation of this growth.
Finance expansion fastest
Not to be left behind is the finance subsector,
which posted the fastest expansion among services at 11.5 percent,
as banks brought down their bad loan ratios to pre-crisis levels
even as their capital buildup allowed them to generate more revenues
form more and better quality assets. Bank lending has picked up to
its quickest at 7.1 percent, thanks largely to record low interest
rates.
Indeed, three successive cuts by the BSP in its
overnight rates saw market rates dip to record lows. This was partly
due to the government’s improving finances, as a narrowing fiscal
deficit allowed it to reduce its borrowings. It plans to reduce its
funding gap to P63 billion this year, which is likely after a
successful sales binge of key assets, including crown jewels in the
energy sector.
Also responsible for the low rates is a benign
inflation environment, as price increases slowed to record lows,
partly owing to more robust external trade, as cheap imports brought
about by a strong peso and healthy dollar reserves tempered domestic
inflation.
The benign inflation outlook has led banks, such
as industry leaders Metrobank and BPI to offer low interest rates
for long-term loans, such as for housing, to match the cheap funding
they raised to build up their capital.
Modest agriculture growth
The exception this year however has been the
agriculture sector, as growth suffered from a prolonged dry spell.
Comprising a fifth of the economy, this sector’s expansion was
kept at 4.7 percent in the first three quarters, with officials
pessimistic about meeting full-year targets.
In any event, observers have conceded the
country’s respectable growth this year. Moving forward, lingering
financial market turmoil caused by the US sub prime mortgage crisis
as well as near record oil prices may however dampen economic
expansion.
According to the Asian Development Bank, growth
will remain intact but would slow down a bit next year due to the
impact of these external factors. The country’s economic managers
raised their forecast GDP growth next year, but kept it below this
year’s emerging figure.
2008: Pump priming needed
The BSP said businessmen it polled still were
optimistic that this year’s economic performance would spill over
to 2008. In the first quarter alone, respondents plan to expand
capacity and hire more workers.
Given the expected slowdown of exports and
domestic consumption, state-led pump priming would be key to
propping up the economy next year. In light of the government’s
reliance on asset sales for its capital spending this year,
addressing its perennial tax collection shortfall would be crucial
in 2008.
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