NEDA's fearless forecast for 2006: 5.7-6.3 GDP growth rate

How will the Philippine economy perform in 2006? “For 2006, we made our run of our economic model and we came with a fearless forecast for 2006 is 5.7-6.3 GDP growth rate. That’s the official government target,” says Augusto B. Santos, director general of the National Economic and Development Authority, when I interviewed him a few weeks ago. The assumptions for this forecast, he said, include successful implementation of the EVAT law raising the value added tax from 10 to 12 percent, stabilization of the oil prices in the world market, and higher public spending for infrastructure. Neda also hopes to “translate the high GNP into GDP” by funneling the rising foreign exchange coming in towards productive economic activities. Santos admits, however, that politics will be the wild card that is not factored in the equation and he is crossing his fingers that the economy’s firewalls are stronger enough to withstand whatever political drama will unfold for the rest of the year. Excerpts:

Question: Could you please tell us some of the highlights of the Philippine economy in 2005?

Answer: There are still no actual figures yet for the entire year as to the actual economic performance in 2005. I will be announcing that on January 30. But we have made a forecast ranging from 4.8 to 5.1 percent GDP growth rate. We were really affected by the increases in oil prices and this had the effect of increasing inflation. Increasing inflation in turn had the effect of dampening consumer demand. That, in turn, slowed down the economy. Our earlier projection in 2005 of 5.3-6.3 percent growth rate; we have to downscale that to 4.8-5.1. And of course, 2005 saw the start of the implementation of EVAT last November 1. We forecasted the inflation rate for 2005 at 7.9 percent but in turned out, based on the last results, that the average inflation rate for the whole year is 7.6 percent. To a certain extent, particularly for the whole quarter of 2005, we feel that certain political developments affected the performance of the economy. The third quarter of 2005 was the height of the impeachment process. Somehow, based on our study, we could not help but say that these political developments affected the economy. As you know there is a correlation between political stability and investor confidence. National government fiscal [reforms] continue to perform very well. The target for 2005 was a deficit of 180 billion, but it looks like it’s only P145 billion. This is what the President is talking about: theoretically we have a saving of P35 billion pesos which the government wants to use to prime the economy for first quarter of 2006.

In 2006, how will the economy perform?

For 2006, we made our run of our economic model and we came with a fearless forecast for 2006 is 5.7-6.3 GDP growth rate. That’s the official government target.

What are the assumptions?

One of the major assumptions is increasing the EVAT from 10 to 12 percent this coming February 1. In the estimate of our department, we are going to generate additional P55-80 billion revenue and that’s a lot of money that we can use to construct roads, to pump prime the economy. Another major assumption is stabilizing oil prices. If you notice, the price of oil is still increasing but it’s gradual. It’s no longer volatile. Medro humuhupa na [It’s somewhat stabilizing].

What will be the leading sector in the 2006 growth forecast?

Services. For the past several years, it has been services. And even for 2006, we still look at services as the lynchpin of the Philippine economy. When I say services, maraming category yan but its mainly communications, trade, banking, transportation. Services will be the fastest, the biggest, followed by industry, particularly manufacturing, followed by agriculture, fishery, and forestry. In that order.

What are the prospects for construction?

In the third quarter 2005, there was little bit of economic slowdown because there was government underspending because of our austerity measures. Government or public construction was down, private construction was down. For 2006, in view of government decision to pump-prime the economy, we expect that government construction will go up. The economic theory is very simple. If the private sector sees that the government is spending, the private sector will follow through.

I suppose you also expect OFW money to prop up the construction sector.

Yes. Talking about real estate or property development—this is also included in the services sector. So it’s also a source of growth. For 2005, property development has contributed a lot to economic growth. In fact, anecdotally if you to go to the Ilocos provinces you will see a lot of new houses there. Those were built by OFW money. By the way, in terms of OFW deployment, we use to send drivers and mechanics, now we are sending doctors, nurses, teachers, caregivers. So there is higher skills, higher value. That’s why the remittances are higher while net deployment is down.

How do you see exports performing?

That’s a good question because there is a global slump in electronics. That’s little bit of bad news for us because it’s our number one exports, followed by garments. For 2006, we hope that the electronics sector will recover in terms of global demand so that our own electronics industry will recover but it is not clear that’s why I’ve been making pronouncements that we can’t just depend on electronics. We really have to diversify.