According to figures from the National Statistical Coordination Board (NSCB), the Philippine economy expanded at a modest pace during the first quarter despite the distractions of government arising from the political infighting and security problems.  GDP expanded by 3.8 percent in the first three months and indeed this was an improvement from the 2.9 percent growth recorded in the same period last year. The Gross National Product (GNP) which represents the sum of GDP and overseas earnings (net factor income from abroad), improved at a faster rate of 4.9 percent in the first quarter of the year from only 3.4 percent during the same period last year.

A more detailed analysis of growth in the first quarter of the year would show that the agriculture and fishery sector grew 4.4 percent while forestry improved by 4.9 percent. Under the industry sector, mining and quarrying expanded by 35.8 percent; manufacturing, two percent; and construction by 1.5 percent. The combined electricity, gas and water sector saw an 8.8 percent contraction during the quarter. In the services sector, the combined segment of transportation, communication and storage expanded by 9.7 percent; trade, 5.3 percent; dwellings and real state, 3 percent; private services, 5 percent; and government services, 3.4 percent. The financial industry contracted by 0.7 percent. Net factor income from abroad, which includes earnings from investments and dollar remittances by overseas Filipino workers, rose by a hefty 22.5 percent during the quarter.

All three major segments of the domestic economy posted growth during the period, led by a 4.8 percent expansion of the services sector, which contributed 45.9 percent to the overall GDP. The combined Agriculture, Fishery and Forestry (AFF) sector, accounting for 21.2 percent of  GDP  grew by 4.4 percent while the industrial sector, contributing 32.9 percent to the GDP, improved by 1.9 percent.

With these figures, the National Economic Development Authority (NEDA), the highest economic planning agency in the country, has claimed, "the economy is on track to meet the government's growth forecast in real GDP growth of 4 percent to 4.5 percent, and in real GNP growth of 4.5 percent to 5 percent in 2002."

The economy is showing brisk performance in terms of household spending. Personal consumption expenditure (PCE) grew by 3.4 percent in the first quarter while government spending posted a minimal 0.1 percent decline during the same period. Capital formation, however, slowed by 1.3 percent.

The domestic economy also drew strength from a gain in agricultural production, a slight improvement in automotive sales (commercial vehicles only) and a strengthening peso vis-à-vis the US dollar. The inflation rate fell below 4 percent in the first quarter of the year from 6 percent during the same period last year. 

A Decline in Purchasing Power

So much for the good news. Even if the government figures are to be believed, when measured in terms of real per capita growth, the 3.8 percent GDP expansion translates to only 1.6 percent increase in per capita income while the 4.9 percent GDP growth is tantamount to only 2.7 percent improvement in per capita GNP. The Philippine population is growing at an annual rate of around 2 percent.

Price inflation is coming down but overall these numbers suggest that consumer purchasing power is still shrinking.

So from where is the money to bolster consumer spending coming? Probably, it is from the remittances of overseas workers. Take that from the equation and the picture would look bleak indeed.

The Philippine economy could be growing at a faster rate, had it not been for a massive 79.4 percent drop in new capital infusion. Data from the Philippine Economic Zone Authority and the Board of Investments, the country's leading investment promotion agencies show that new investment registrations fell to P8.533 billion in the first quarter of the year from P41.444 billion a year earlier. Late in the second quarter there were some signs that capital inflows were picking up although the numbers are not yet sufficient to determine any clear trend.

Investors continue to aver the lack of infrastructure in the country, with the World Bank saying that the Philippine government would need some US$35 billion to US$45 billion in fresh investments from the private sector over the next ten years in order to improve its infrastructure.

The Government Admits it is “Broke”

The country's budget deficit overshot the programmed amount by almost 16 percent in the first quarter while new investments plunged 80 percent during the same period. By the end of May, the budget deficit had ballooned to a massive P107.5 Billion or 83% of the annual target of P130 Billion. If achieved, this level will be below the 2001 deficit of P147 billion but is the ceiling the government needs to attain if it is to close the gap between revenue generated and government expenditure by 2006.

Incredibly, government officials still claim that they are “on target” for the year as a whole. In the same breath they admit that the government is broke and will be tightening the belts of the 1.5 million employees on the government payroll. This admission appears an open invitation for some agencies to find innovative ways of developing income streams – formal and informal.

The non-performing loan (NPL) ratio of the commercial banks remains high at 18 percent of the total and there are signs of a coming credit squeeze with some banks proposing a moratorium on issuance of new credit cards. This sounds ominous and as though much of the growth in short term consumer spending has been financed on credit.

Both Stocks and Property Remain Depressed

Manila stocks which were tracking an upward path during the first quarter, took a downswing in April and May. By the end of the latest period stocks were at their lowest point since December last year and any gains from the early months had been wiped out.

The local property sector remains in the doldrums. One international property consultancy firm has predicted recently that office space rentals would further drop by 15 percent this year, because of large volume of available space and slow entry of new occupants.

The same report suggested that office space take-up fell by as much as 57 percent to 11,944 square meters in January this year from 27,741 square meters a year earlier and believes it will take some time before the current office space glut subsides. Office space rents are said to have contracted by over 50 percent since 1997, due to the Asian financial crisis and then the global economic downswing last year. 

The average rent for Grade A office space is now around P400 per square meter in the Makati commercial business district (CBD) and P250 per square meter in Ortigas CBD. Capital values of office space are placed at around P50,000 per square meter in Makati CBD and P30,000 per square meter in Ortigas. 

With removal companies reporting a higher outflow of expatriates than inbound, the glut of high quality office and residential space seems likely to increase in the short term. Now would seem to be a good time to lock in contracts for the longer term.

Other Concerns

Other current issues that intimidate investors from putting capital in the Philippines are its seemingly unclear trade policies and ongoing controversies in the energy sector. 

The business sector has been asking the Arroyo administration to clarify its stance on international trade and market opening and adopt to adopt a common and consistent stance on trade disputes such as those involving imported cement, second hand vehicles and appliances.

More recently however the issue hitting the headlines has been the controversy surrounding the energy sector which underpins much of the Philippine economy. The root of the controversy lies in the Build-Operate-Transfer (BOT) scheme that paved the way for the entry of substantial investments during the term of former President Fidel Ramos (1992-1998) and the recently adopted Power Reform Bill. 

Filipino legislators – for their own motives – have been investigating the incentives offered by the Ramos administration to 43 independent power producers (IPPs), which have subsequently infused a total of US$10 billion since 1992. While the BOT scheme helped solve the energy crisis, militant groups are now blaming it for the high prices of energy in the country. 

The controversy in the energy sector if it persists will most likely affect adversely the inflow of capital into other sectors. At a time when the country is already getting only a very small share of foreign direct investments flowing to Asia, the last thing this country needs is a fight on the very piece of legislation, which investors view as the best thing that the country can offer, aside from its human capital.

Ahead of Indonesia But Behind Most Others in the Region

The Philippines has been ranked as the world's 40th most competitive economy in the 2002 World Competitiveness Year Book by Switzerland-based Institute for Management Development (IMD). This competitiveness survey ranked the Philippines ahead of Indonesia but behind other East Asian countries such as Singapore, Hong Kong, Taiwan, Malaysia, South Korea, Japan, China and Thailand.

The country is not expected to make headway in the competitiveness ranking any time soon as it remains burdened by a mix of political and economic woes. While it seems that the Philippines just might manage to post a growth of over 4 percent this year, this level of expansion will have little significant impact on the lives of the Filipino people, some 40 percent of whom are living below the official poverty line. The country’s fast population growth easily eats into any economic expansion below five percent.

But There Are Opportunities

As an investment destination, the Philippines still offers opportunities in the retail and information technology (IT) sectors. Consumer spending, which comprises over 70 percent of the GDP, has been growing by over 3 percent annually – and as noted is largely fuelled by remittances from overseas which are probably massively understated in the official figures.

Starting March this year, the Philippines has allowed foreign investors with total investments of over US$2.5 million, to own up to 100 percent of a chain of retail stores in the country.

If the government can ever get the security situation under control there will be major opportunities in the tourism sector.

Meanwhile, the Arroyo government has been trying to entice foreign IT companies to outsource at least some of their operations to the Philippines. A number of foreign companies have also set up call and contact centers in the country because labor cost here are a lot cheaper than in the US, Europe and the more prosperous Asian countries.

This country suffered severe political and security problems throughout 2000 and 2001, yet the economy still managed to post growth of 4 percent and 3.4 percent respectively in those years. Overall there are reasons to believe that the Philippine economy will track a path of moderate but unexciting growth at least in the next seven quarters until the 2004 presidential election. 

After that time, if President Arroyo can get her hoped for clear mandate, some real and fundamental changes may be on the cards that would see the Philippines finally move ahead. But this is a country of many false starts and the future is by no means certain.

Latest Exchange Rates

Exchange Rates (End June 2002)
Pesos to the US Dollar	50.6800
Pesos to the Australian Dollar	28.2541
Pesos to the Euro	49.4738
Pesos to the British Pound	77.4086
Pesos to the Japanese Yen	0.4213

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