Philippines: The Economy and Fiscal Situation Improve

2006

Lorraine Carlos Salazar

For a country characterised by political manoeuvring and a dearth of positive developments, the economic and fiscal data released in the last few weeks has been quite encouraging.

First, defying expectations of both domestic and international analysts and in spite of high oil prices, the Philippine economy grew at 5.6 per cent during the first half of 2006, compared to 4.2 per cent a year ago. On the supply side, growth was underpinned by a rebound in the agricultural, manufacturing, and financial sectors. On the demand side, the economy was driven by robust domestic consumption and strong demand for electronics exports, growing at 22.3 and 5.2 per cent, respectively. Using another measure, the GNP rose 6.6 per cent, fuelled by a double-digit (18.3 per cent) increase in the net factor income from abroad. Overseas Filipino workers' remittances grew 15.4 per cent during the first half of 2006, totalling US$6.0 billion compared to US$5.2 billion in the same period last year. This has led to enhanced consumer demand, and raised the country's gross international reserves to an all-time high of US$21 billion. Also, this has contributed to the Peso's strength, which reached a four-year high of 50.06 to the US Dollar on 19 September.

The other positive development is that the government is on the road to reaching its goal of reducing the fiscal deficit to P125 billion (2.2 per cent of the GDP) for 2006, down from 5.3 per cent in 2002. The fiscal deficit has been the most watched statistic in the past months, acting as a bell-weather of investor confidence. Atypical of the Philippines, the government posted its fourth-month budget surplus in August. For all the political noise, the government is actually making headway in reducing its fiscal deficit because of the implementation of the expanded value-added tax, improvements in revenue collection, and the freezing of spending at last year's levels - due to an impasse between the House and the Senate. For the first half of 2006, total tax collection rose 25 per cent - something that has not happened since 1997. Although the Bureau of Internal Revenue (BIR), which accounts for about two-thirds of the government's total tax collection, did not reach its collection target, it nonetheless registered a 22.4 per cent year-on-year increase in revenue. The upside of improved revenue performance is that these can now be translated into social services and provision of infrastructure. Already, Finance Secretary Gary Teves has announced that 22.5 per cent of the additional EVAT revenues will help finance social services and infrastructure projects such as a) school feeding programs, b) health insurance subsidies for indigent families, c) the extension of a light rail line to Cavite, d) training programs for teachers and school administrators, e) new textbooks and instructional materials, f) new school buildings, and g) rural electrification.

Nevertheless, while the economy is growing respectably, much more needs to be done. First of all, the economy is currently driven by consumption, not productivity growth. For the latter to occur, investments in public infrastructure and social services are necessary. However, the government's capacity to do so is constrained by its fiscal position. The challenge is thus to increase investment in infrastructure without sacrificing its fiscal targets. Second, without doing something to control the population growth rate, the economy's modest rate of expansion will not translate into higher per capita incomes or make a dent on poverty levels.

In the past years, the Philippine economy has remained resilient amidst external and domestic threats. The main challenge is to sustain and accelerate growth to a level where it can really make an impact on the standards of living of the majority of Filipinos. According to the Asian Development Bank, the economy needs to grow consistently between 7 to 8 per cent before growth can significantly reduce poverty. Given the high rate of population growth along with respectable - but not rapid - economic expansion this does not bode well for the Philippines.

Nevertheless, while the country's good economic performance will not win votes in the upcoming May 2007 elections, it can win the confidence of the international community. Hopefully, this will translate into better credit ratings and, thus, investments that can bring concrete benefits to the bulk of the population.

WATCHPOINT: Will the economic data have an impact on political developments in the country, or is there really, increasingly, a firewall separating the economy from the political system?

 

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