The Philippines in 2007: Growth, but also poverty, will linger

The Philippines' economic performance turned not a few heads in 2006. The solid fiscal performance of the Arroyo administration has boosted hopes that the budget is well on its way to being balanced by 2008. This positive signal has attracted investors and spurred talks of an eventual credit rating upgrade for the country by the first quarter of 2007. Yet even as the economy performed well in 2006, and could do as good in 2007, analysts say that it must still do better so ordinary citizens could feel the impact, and benefits, of growth. Until then, a splitscreen image could linger: a national household that is doing well, amid historically high levels of actual and self-rated poverty among Filipino households. The country's economic managers expect gross domestic product growth to kick in at 5.5 percent, the bottom of its target range for 2006 of 5.5 to 6.1 percent, and then rise slightly to 5.7 percent in 2007. In a recent poll by GMANews.TV, seven analysts somehow agree. The median average of their forecasts shows that the Philippine economy is expected to grow 5.37 percent in 2006, and 5.34 percent in 2007. Robust exports and a strong peso have combined to restore confidence in the Philippine economy, according to the global forecast report for 2007 of the United Overseas Bank. "On the whole," it said, "the Philippine economy has enjoyed a relatively good year in 2006. Exports grew robustly, and the peso has been one of the best performing Asian currencies against the greenback." "Confidence in the Philippine economy remains good, continuing to lift sentiment in the peso and the local stock market into 2007," the report added. The ongoing fiscal consolidation has also resulted in some good results: interest rates at historic lows, and a decade-best performance for the stock market. The Philippine Stock Exchange composite index ended the year at 2,982.54 points, its best ending in nearly a decade. The peso is also at multi-year highs against the US dollar, ending 2006 at 49.03 against the dollar, its strongest in almost six years. The runs of both the equities market and the local currency are expected to be sustained into the coming year. Analysts say the PSE index will likely hurdle the 3,000 level next year, while the peso is expected to break past 48 to a dollar. Weak exports, strong demand The exports sector was a major factor that powered the local economy this year, as it grew 16.6 percent from January to October, despite the local currency's strength and a slowdown in the United States economy. Next year, however, exports growth is expected to taper off, on account of weakening demand for electronics, the country's chief export, and an economic crunch in the US, the country's largest trading partner. "Given the GDP figures and leading indicators like the US semiconductor book-to-bill ratio, further deceleration in the Philippines highly electronics-dependent export sector seems inevitable over the course of 2007," Singapore-based DBS Bank said in its latest report on the Philippines. From a six-year high of 20.6 percent growth in exports recorded last June, DBS expects exports to dip to a 7.8 percent average growth in 2007. Still and all, analysts say the economic impact of slackening exports growth would be helped by healthier domestic demand, sparked in part by remittances from overseas filipino workers (OFWs). These remittances, which have supported the peso against the dollar throughout the year, are expected to hit $13.4 billion by the end of 2006. As of October, OFW earnings have reached $10.3 billion, or 10 percent of the country's GDP. "Will domestic demand help pick up the slack (from exports decline)? Our estimates suggest that this will be the case, though to a degree just enough to maintain- rather than accelerate- the pace of overall growth," DBS said. "The Philippine economy remains heavily dependent of remittances by overseas workers. Although remittances are excluded from GDP calculation, consumption spending in the Philippines to a large extent is fuelled by such remittances," the UOB report added. Nonetheless, surging remittances have flooded the Philippines with cash. As of September 2006, money supply or m3 has grown 14 percent, the highest growth registered in a year. The BSP has pointed to the high level of m3 as the most pressing inflationary pressure, justifying its refusal to lower interest rates. Analysts expect inflation to be tempered by the continuing strength of the peso. In the same GMAnews.TV poll, they say they expected inflation to slow from 6.4 percent this year to 5.07 percent in 2007. Gov't spending must grow in '07 To the last person, all seven analysts say fiscal consolidation was the Philippines most best economic feat in 2006. As of November, the government had a P58.3-billion deficit, way below its programmed deficit of P125 billion for the year. But they hastened to add that government scrimping forced by the reenactment of the 2005 budget may explain in part the lower-than-programmed deficit for the year. "The fiscal deficit was substantially cut for the first three quarters of 2006. Even with the expected increase in spending for the recent disaster-hit areas, we are likely to see the deficit to come in at 1.1 percent of GDP in 2006, compared to last year's 2.7 percent," United Overseas Bank said in its quarterly global outlook report. "Improving revenue and disciplined spending restraint by the government should see the fiscal deficit narrow further in 2007," UOB added. To be sure, the low-spending scenario has become a double-edged sword for the local economy. Analysts, also unanimously, pointed this out as one area where government needs to improve on most. "Poor infrastructure investment … (is a) major constraint in enhancing the country's competitiveness. Public and private investments at 2.3 and 12.8 percent of GDP respectively in 2005 are very low compared to neighboring countries," the World Bank said. If the proposed 2007 budget were any indication, the government does seem determined to reverse the scrimping trend. For 2007, the current administration has sought congressional approval of a P1.126-trillion General Appropriations Act. Of this, P763.6 billion is allotted to the Department of Public Work and Highways, which is in charge of infrastructure projects. Poverty still widespread Local economists, however, say the government should also set aside whatever surplus it has from tax collections for social services spending, so that the citizens may finally benefit from the impact of economic growth. "If the government uses the incremental revenue for infrastructure spending and education, it should have the long-term effect of growing income and income distribution," Philequity Partners economist Jojo Gonzales said. The latest survey from local pollster Social Weather Stations show that the incidence of hunger in the Philippines has reached a new high. In the fourth quarter of 2006, at least 19 percent of families in the country, roughly 3.3 million households, experienced involuntary hunger at least once in the last three months. Fifty-two percent of those polled also described themselves as poor. World Bank data support the survey results. As of 2005, the lender's data show that 10.8 percent of the country's population survive on just $1 a day, and another 41.2 percent make do with less than $2 daily. The poverty situation in the Philippines, according to the World Bank, is worse than that of its counterparts in the region. Jonathan Ravelas, Banco de Oro’s chief market strategist, says that through social spending, the country could move into a higher growth trajectory, that is needed for the poor to actually feel the numerical improvement. "The people are not contented because the government is not targeting what the people want, which is education and social services," Ravelas explains. In his mind, Ravelas says, "the country needs to achieve economic growth of 7-10 percent to make a dent on poverty." At the present time though, "the growth rates do not create enough jobs given since it is consumption driven." Under government economic projections, the Philippines may hit 7 percent growth in 2009 yet, when the local economy is expected to rise between 6.3 to 7.2 percent. Until then, despite rosy economic prospects and a possible credit rating upgrade, a sad, sorry picture may endure: historically high levels of actual and self-rated poverty among Filipinos who could not as yet feel or revel in the fruits of growth. - GMANews.TV