Asia Times Online
By Joel D Adriano
MANILA - The Philippines avoided a technical recession amid the global economic downturn, but recent indicators point to a less buoyant recovery than in other developing economies in the region.
The Philippine economy is now poised to grow at its slowest level in over seven years and economic analysts believe it will remain sluggish over the next two years due to rising debt and laggard investment levels.
The government announced growth of only 0.8% in gross domestic product (GDP) in the third quarter compared with a year earlier, below the 1% to 1.5% private economists had previously forecast. The weaker-than-projected result was linked to a sustained decline in manufacturing, which fell by 7.6% year on
year due to weak exports and declining new investment.
That bad news was compounded by a downward revision to second quarter growth, which was officially pared back to 0.8% from an initial 1.5% estimate on weaker-than-expected growth in services and the smaller-than-expected impact of a 330 billion pesos (US$7 billion) economic stimulus plan intended to create jobs and boost domestic demand.
At current rates, the country's GDP growth will drop just below the government's full-year growth target of between 0.8% to 1.8% and fall off substantially from last year's 3.8%. Nikhilesh Bhattacharyya, an associate economist at international ratings agency Moody's, expressed his concerns over the consistent disconnect between the government's rosy assessments and the underlying economic and financial realities.
Many international economic analysts, investment banks and donor organizations had earlier revised their growth figures up only to realize later the unreliability of government estimates and data. The government now projects GDP growth of between 2.6% to 3.6% in 2010, which factors in an expected boost from election-related spending in the first five months of the year.
Those positive projections are already being met with skepticism among economic analysts in light of the apparent upward fudging of official statistics earlier this year.
National Economic Development Authority director-general Augusto Santos says that he expects a "slow" and "volatile" recovery next year.
Throughout the global downturn, the Philippine economy has relied heavily on foreign remittances from an estimated 11 million overseas Filipino workers (OFWs). Remittances are on course to reach US$16 billion this year, representing the main driver of domestic consumption and well over 15 times the amount attracted in new foreign investment.
Future remittances, some analysts warn, could take a hit from Dubai's emerging debt crisis. According to data from the Philippine Overseas Employment Agency, about 20% of newly hired and rehired OFWs last year landed in the United Arab Emirates (UAE), of which Dubai is one of seven members. More than 80% of Dubai's workforce consists of foreign workers and OFWs are believed to be its largest source of labor.
Of the estimated 350,000 to 500,000 Filipinos now living and working in the UAE, about 250,000 are based in Dubai. Many of these workers first arrived as "tourists", adding to their vulnerability to deportation with the mounting downturn. Migrante, a non-government organization, reports that OFW salary payments in the UAE now face delays, while some OFWs have agreed to take pay cuts rather than be sent back to the Philippines.
Back home, storms and flooding on the main island of Luzon, including in the capital Metro Manila region, are expected to significantly dampen fourth-quarter growth and will stretch further state finances as the government struggles to rebuild vital infrastructure and damaged farms.
Agricultural output figures are expected to decline as the sector suffered storm-related damage estimated at 47 billion pesos. The storm-hit regions account for two-thirds of the economy. Romulo Virola, head of the National Statistical Coordination Board, estimates the storms could trim fourth quarter GDP growth by 0.6%.
A post-disaster needs assessment report issued by the World Bank estimated that overall damage and losses to crops, properties and infrastructure from typhoons Ketsana and Parma reached $4.4 billion, or 2.7% of the country's GDP. It also estimated that the storms, which the bank described as the worst natural disaster in the region since the tsunami of 2004, pushed some 480,000 Filipinos into poverty.
"Total income lost due to the disaster amounted to 50.3 billion pesos, which particularly affected informal workers," the report said.
Rising debts, falling potential
It is now easy to forget that President Gloria Macapagal-Arroyo presided over 7.2% GDP growth in 2007, the fastest clip the country experienced in over 31 years. Yet some economists saw the temporary surge as more of a statistical illusion than a sustainable trend, given that poverty incidence has worsened during the eight years Arroyo has been in power.
Cielito Habito, an economics professor at the Ateneo de Manila University, estimates that 35% of the population now lives under the poverty line, up slightly from 33% in 2006. Meanwhile the percentage of the population considered "poor" has remained close to two-thirds of the population over the past two decades, although the absolute number could have doubled given the rapid increase in population.
Under Arroyo, a US-trained economist, corruption has been rampant and some of the highest profile cases allegedly involve the first family. In terms of corruption, the Philippines ranks better than only three of its Southeast Asian neighbors - Timor-Leste, Cambodia and Myanmar - at 139th out of the 182 economies surveyed in Transparency International's 2009 Corruption Perception Index. A survey conducted last year by the Political and Economic Risk Consultancy among expatriate businessmen ranked the Philippines as one of the four most corrupt countries in Asia.
Many Filipinos are optimistic that the cycle of corruption could be broken with the outcome of the 2010 presidential elections, in which Arroyo is legally not allowed to stand. Senator Benigno "Noynoy" Aquino III is the present front runner in the presidential race, with fellow senator and self-made billionaire Manuel Villar running second, according to recent opinion polls. Many among the business community hope that either candidate will prioritize more transparency and less corruption in government.
Regardless of the winner, the Philippines' next president will have only marginal macroeconomic room to maneuver. Arroyo's government has already transcended this year's 250 billion pesos budget deficit cap with deficit spending of 266.1 billion pesos through October. That pump-priming represents nearly four times last year's total shortfall of 68.1 billion pesos.
Benjamin Diokno, former budget secretary and professor at the UP School of Economics, said this year's total deficit will likely breach 300 billion pesos, or 3.8% of GDP. The Arroyo administration has projected an additional deficit of 233.4 billion pesos for 2010. Some analysts fear the growing debt load could weaken the currency and spark new inflation, even with the growing weakness of the US dollar.
The government is banking on revenues generated from privatization, including its contested stake in the San Miguel Corp, worth an estimated 50 billion pesos, to help cover future shortfalls. Other state assets on the block include the 103-hectare Food Terminal Inc (FTI), worth an estimated 13 billion pesos, and a stake in the Philippine National Oil Co Alternative Fuel Corp, expected to raise 11 billion pesos for government coffers.
Those fund-raising plans, however, look increasingly shaky. The government's attempts to float shares in FTI failed to generate investor interest last month for the third time this year due to what one official characterized as a "gloomy business environment". Meanwhile the anti-graft court, Sandiganbayan, has not yet affirmed the legitimacy of the state's ownership of the San Miguel shares it hopes to sell. They were first seized under questionably legal circumstances in 1986 after dictator Ferdinand Marcos was ousted from power.
The failure to dispose of state assets will likely force the government to rely on bond sales to finance this and next year's budget shortfall. As one of the most active global debt issuers, the Philippines has long relied on international bond markets to cover its budget deficits, which ballooned to a record 266.1 billion pesos this year.
In October, the government floated an additional $1 billion in 25-year bonds, bringing total foreign debt issuances this year alone to $3.25 billion. Next year it is looking towards a Samurai bond issue as part of a $2 billion foreign debt issuing plan. But the cost of raising funds offshore is expected to rise with the Dubai debt crisis and the Philippines growing deficits. Samurai bonds are denominated in yen and issued in Tokyo by a non-Japanese entity while being subject to Japanese regulations. The benefits to the issuer access to capital in Japan and can be used to hedge foreign exchange rate risk.
Meanwhile, the overall competitiveness of the Philippines is declining. The Swiss-based International Institute of Management Development last month ranked the countries last of 13 Asia-Pacific countries included in its 2009 World Competitiveness Yearbook. The poor assessment was based mainly on the country's poor infrastructure and stubbornly high population growth and poverty rates.
Economists say Philippine GDP must grow by over 7% consistently for the next 10 years to reduce poverty levels by half, in line with the government's commitment under the United Nations Millennium Development Goals. That is a trajectory it has achieved only once in over three decades. The Philippines may have survived the recent global economic crisis, but Arroyo's successor will face substantial economic challenges.
Joel D Adriano is an independent consultant and award-winning freelance journalist. He was a sub-editor for the business section of The Manila Times and writes for ASEAN BizTimes, Safe Democracy and People's Tonight.
source:http://www.atimes.com/atimes/Southeast_Asia/KL05Ae01.html
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