Ortiz, Leonard M.

BSCRIM III Philippine economy faces growth threats in 2012

MANILA, Philippines The Philippine economy is facing major risks from abroad that could limit its growth prospects next year, the central bank governor said Wednesday. Although the country enjoys sound macro economic fundamentals, and strong domestic demand, the economy could still be hurt by developments in Europe, the United States and China, central bank governor Amando Tetangco said. The 2012 global economic outlook has deteriorated, he said, warning that there would be more volatility and uncertainty that could affect the Philippines. Although economic growth has slowed, we have not seen a contraction in 2011, he told a forum of foreign correspondents. The economy grew by 3.6 percent in the first nine months of the year, though the government maintained its full-year target of 4.5-5.5 percent, pinning its hope on a $1.66 billion state spending program launched in October. Next years official growth target is 5-6 percent. Tetangco said fears of an escalating debt crisis in Europe, the continuing weak US labor market and the risk of a slowdown in China could weigh on Philippine growth prospects in 2012. They could result in a drop in trade, investment and official aid, he said, warning that even earnings from the countrys booming outsourcing industry and the remittances of nine million Filipino workers overseas could be affected. A. Government System and Its Performance The national government worked to reduce its fiscal deficits for five consecutive years, to 0.1% of GDP in 2007, and had hoped to balance the budget in 2008, two years ahead of its original plan. However, the global slowdown has affected these plans, and the budget deficit in 2008 is estimated at around 1% of GDP. In February 2009, government officials said they anticipated that the shortfall would increase to 2% of GDP in 2009 as revenue falls amid a slowing economy, and the government boosts spending. The government now expects to balance its budget by 2011. The governments response to the global financial crisis has included a package of support for returning foreign workers, and increased spending on social services and community infrastructure projects, which it hopes will fuel economic activity and support growth. There have also been a number of technical measures to improve liquidity in the banking sector. The corporate income-tax rate is set to fall to 30% in 2009, from 35% in 2008, under a tax-reform law. The governments privatization program boosted revenues in 2008 and 2009. In January 2009, the government received around US$1 billion in partial payment from a consortium that won the right to operate the countrys power grid. In February 2009, the government said that it planned to negotiate the sale of a 600megawatt, coal-fired power plant after a unit of the French utility firm Suez backed out of a deal to buy the facility. Emerald Energy Corp made a winning bid of US$786.5 million for the Calaca plant, south of Manila, through a state auction in 2007, but it said in January 2009 that it could not complete the deal after the condition of the plant deteriorated. The Central Bank of the Philippines (Bangko Sentral ng Pilipinas) tightened monetary policy in mid2008, raising policy rates in June, July, and August by a combined 100 basis points. However, it left rates unchanged at the October and November monetary meetings, citing an improving outlook for inflation. The central bank cut rates by a combined 100 basis points in January and February 2009, citing falling inflationary pressures, and a weakening economic performance. Following near-record growth of 7.3% in 2007, the Philippines economy slowed in 2008 as a result of the global economic downturn, expanding by around 4.4%. The International Monetary Fund (IMF) is projecting growth of 3.5% in 2009, driven by softening external and private domestic demand, but other analysts are more pessimistic. The credit rating agency Moodys has forecast that the economy will expand by just 23%. The global economic crisis, which has caused layoffs among Filipinos working overseas, has affected worker remittances to the Philippines. Remittances rose by just 0.8% in December 2008 from a year earlier, to US$1.4 billion, slowing dramatically from double-digit increases earlier in the year, according to the central bank. The central bank expected remittance growth of between 3% and 6% in 2009, but Moodys anticipates that remittances, a major driver of consumption, will drop by 510%.

The global slowdown is having a dramatic impact on exports, and on manufacturing sectors geared towards overseas markets, such as electronics. Philippines exports plunged by 40.4% in December 2008 from a year earlier, the steepest fall in over two decades, and in step with export data from other countries in the region due to weak global demand. Electronics shipments alone contracted by 47.6% in December. Overall, export earnings fell by 2.86% in 2008. In February 2009, the government forecast that exports would fall by 8% in 2009 as key overseas markets fall into recession.

B. Various Social Unrest and Crimes The Republic of the Philippines was once one of the richest countries in Asia, but economic mismanagement and corruptionmost notoriously during the presidency of Ferdinand Marcos, who ruled from 1965 to 1986reduced the archipelago to one of the poorest. The economy has enjoyed relatively strong growth rates for much of the past two decades, but agriculture still accounts for around 20% of GDP and employs around 40% of the workforce. The country does have a growing manufacturing sector, producing goods such as semiconductors and electronic microcircuits, finished electrical machinery, and garments. Like India, the country is also benefiting from the outsourcing of IT operations from developed countries. Mining is potentially one of the biggest industriesthe country is rich in chromite, copper, nickel, and coaland natural gas has been discovered. A good educational system and the fact that Filipinos are taught in English means that their services are in demand abroadworker remittances account for more than 13% of GDP.

C. Environmental Status Unemployment rose in 2008 as the global downturn hit the manufacturing sector. The countrys jobless rate stood at 6.8% in October 2008, compared with 6.3% a year earlier. In February 2009, Socioeconomic Planning Secretary, Ralph Recto, further estimated that as many as 800,000 Filipino workers were in danger of losing their jobs in 2009a figure which, if realized, would push the jobless rate to above 10%. Inflation hit a 10-year high of 9.3% (annual average) in 2008. However, in February 2009, the central bank forecast that inflation would fall to 3.9% in 2009, lower than earlier estimates of 68%, and within the governments target of 2.54.5%. Tumbling commodity prices and weakening domestic demand are driving down inflation. The annual rate fell to 7.1% in January 2009, from 8% in December 2008, as prices for food and other basic commodities eased.