Dubai adds to the Philippines' woes
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.
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