Briefing Notes for the Launch in Manila, April 2007
GDP Growth performance and prospects
- Economic growth remains firm. GDP expansion in 2006 was 5.5 per cent from the 5.0 per cent in 2005 with ESCAP forecasts at 5.6 per cent for 2007.
- Official forecasts were raised to 6.1 per cent in early 2007 due to increased remittances from the 8.0 million Philippine nationals living abroad combined with lower oil prices to boost domestic spending.
- Remittances account for around 10 per cent of GDP and were reported higher by as much as 14 per cent in the last quarter of 2006 with spending in a wide range of areas from education to consumer goods and services.
- Increased government spending on infrastructure is also expected to contribute to the positive outlook.
Inflation and Monetary policy developments
- The falling inflation rate came in at 6.2/6.5 per cent in 2006 from 7.7 per cent a year earlier. ESCAP forecasts for 2007 are for prices to rise by 4.5 per cent. Other official forecasts says inflation drop to lows of 3.5 per cent buoyed reduced oil costs.
- Money supply growth accelerated to 12.6 per cent in 2006 from 6.4 per cent a year earlier and from the 9.9 per cent growth in 2004.
- Inflation data for March 2007 reported the lowest levels for 20 years at just 2.2 per cent, leaving the quarterly rate at just 2.9 per cent.
Fiscal Policy developments
- The Philippines posted its smallest budget deficit in eight year in 2006, buoyed by higher revenue from taxes – especially value added tax – and spending curbs. The budget deficit fell to around 2.1 per cent of GDP in 2006 from 2.7 per cent in 2005.
- The government plans to report a balanced budget in 2008. Tax and total revenue both rose by 20 per cent due in large part to a higher VAT rate. VAT increase set to raise 75 billion pesos a year.
- The 1.13 trillion peso ($22 billion) budget for 2007, was 25 per cent higher than 2006. Infrastructure spending was up by 70 per cent with education outlays also higher by 21 per cent. Plans to boost public investment include state–owned companies up to 5.0 per cent of GDP by 2010 from 2.0 per cent in 2005.
- Merchandise export growth rate was 14.0 per cent in 2006, marking a rapid acceleration over that of the 4.0 per cent in 2005. Official forecasts are for an 11 per cent rise this year. Import growth rate was close to 9.0 per cent last year from 7.7 per cent in 2005, with the outlook for a 12 per cent rise in 2007.
- The Philippines reported a $4.5 billion trade deficit in 2006, as it recorded an external payments surplus of $3.8 billion thanks to higher overseas remittances which rose by 19 per cent.
- Higher imports were tied to raw materials used in the manufacture of electrical equipment, especially those producing disk drives, mobile phone chips. The electronics sector is also a major exporter.
Capital flows, external debt and exchange rates
- Foreign direct investment exceeded $2.0 billion in 2006 marking strong gains over recent years. Official target is for foreign investment to reach $3.0 billion annually. Net foreign investment in Philippine stocks and government debt jumped 24 per cent in 2006 to $2.6 billion.
- Concerns have been expressed over the Philippines' sharp increase in foreign exchange reserves, reaching a record high of $24.7 billion with strong remittances from Filipino workers and investment inflows set to add to the holdings.
- The peso appreciated by 8.3 per cent against the U.S. dollar in 2006 and has showed further gains in the early months of 2007. The higher peso also eases costs of imports and reduces inflationary pressures.
Key policy issues and responses
- ESCAP says The Philippines would be hard hit from oil price shocks. A sustained 10 per cent increase in world oil prices due to the high level of oil use, with consumer inflation rising sharply. The Philippines imports most of its oil with price adjustments generally following the global trend.
- Positives for the economy include energy reforms by the government are expected to lead to a stronger investment climate and a rise in investor confidence leading to more capital inflow.
- But a U.S. government survey warns corruption remains "pervasive" and remains a major barrier to trade. Regional business surveys have placed the Philippines as the most corrupt regional nation despite official efforts to curb illegal activity and promote transparency.
- Unemployment and under-employment remains issues for the government. Under-employment stands at 22.7 per cent from 17.6 per cent in 2005. The need is for more investment to create jobs. Income inequality is also seen as high relative to other countries in the Asia Pacific region.
- Pressure for the currency appreciation is expected to continue in 2007 with the large United States current account deficit and the continuing flow of foreign currency in the form of capital flows or remittances.
- It will be increasingly difficult for monetary authorities to pursue an independent monetary policy in response to shocks, while targeting exchange rates against the backdrop of more open capital accounts.
- Greater exchange rate flexibility is one sustainable solution. It would take away the "one-way bet" that encourages even more capital inflows than otherwise because markets would quickly realize that the currency could move in either direction.