The Philippines in 2005: A "Manny Pacquiao" economy?

Dennis Arroyo, head of National Economic and Development Authority (Neda) policy and planning division, calls it a “Manny Pacquiao economy.” The year 2005 was when the Philippine economy has to overcome all the hurdles imaginable—political uncertainty brought about by the continuing questions on the President Arroyo’s legitimacy, sluggish export, fiscal problems, deteriorating infrastructure, high energy prices, and threats of military coup. Yet the economy’s seems to have acquitted itself quietly well with a relatively decent 5.1 percent, courtesy of a 6.1 percent spurt in economic activity in the fourth quarter.

But we would rather call it the “people’s economy” essentially because the sources of growth largely came from sectors whose dynamics are largely independent of government’s actions.

As usual, personal consumption expenditure (PCE), accounting for 73 percent of the country’s gross domestic product, carried the day for the economy. It’s apparent that people are buying more food products, clothes, and cellular phones despite the high inflation rates. There are indications that people have actually started to scrimp on their purchases of certain items like beverages; tobacco; fuel, light and water; and household furnishings but the overall figure is still significant enough to lift the economy, particularly the manufacturing sector which grew by 5.8 percent in last quarter and 5.6 percent for the entire 2005.

Where did the people get the money?

As expected, overseas Filipinos sent in a lot of money as shown by the 20 percent fourth quarter rise in the “net factor income from abroad” (NFIA), comprising compensation and property incomes. For the whole year NFIA jumped 13.8 percent (amounting to $10.85 billion), owing to the double-digit growth in dollar remittances as more workers (i.e., about a million) sought foreign employment.

In the fourth quarter, the farms—specifically rice, banana, and fisheries—bounced back thus providing some incremental buying power in the countryside. Also the expansion of economic activities in mining sector (i.e., 9.3 percent growth rate in 2005) and manufacturing (5.6 percent growth rate) may also have led to rising payrolls. Of course, higher remittances coupled with a recovering farm and industry sectors has created a lot of economic activities and revenues for the services sector particularly in banking, telecommunications, wholesale and retail, real estate, business services and import-export trade.

In fact, the sources of growth were pretty broad-based with each major sector contributing their shares to the growth of the economy. The only sector that has failed to pitch is the government. Owing to the government’s continuing failure to collect more taxes, public expenditure has been curtailed, reason why government consumption has been in the negative in the last two quarters of the year. That means that for most of 2005, there have been no substantial investments in vital economic and social infrastructure. In effect, in 2005, the country’s entrepreneurs (e.g., farmers, manufacturers, exporters, traders) were practically on their own without any assistance from the state sector. For much of the year, the government was pretty much preoccupied with controlling spending in an effort to gain a better sovereign rating.

The question now is if the economy rallied in the last quarter of 2005, will that trend carry through the rest of 2006?

Dennis Arroyo says yes, stressing Neda’s earlier target of 5.7 percent to 6.3 percent growth rate. He said that the Philippine economy grew by 5.1 percent in 2005 despite hurdles like high energy prices, tumultuous politics, and the El Niño phenomenon that ravaged the farm sector. The economy, he said, should have grown by 5.7 percent if there was no El Niño. This year, he said, El Niño would no longer be an issue hence it would be possible to achieve the 5.7-6.3 GDP growth rate target.

He admits that high oil prices and the higher EVAT rate may dampen domestic demand but these negative factors maybe counteracted by the continuing rise in remittances, the recovery of electronic exports, a boom in mining activities, the rebound in the farm sector, and the expansion in as OFW families start spending their money for home renovation and acquisition of new houses and lots.

Certainly there are reasons to share Neda’s hope. However, there should be greater scope for caution. It seems to me that Neda has failed to consider the following local and international events in their forecasting exercise.

One—how the world oil prices will play up in the next few months is uncertain. It seems that Middle East politics has suddenly grown murkier with the landslide victory of Hamas in the recent Palestinian election, the continuing impasse over Iran’s nuclear program, and the continuing bloodletting in Iraq. Should these events send oil prices soaring again, local inflation rate could choke the economy.

Two—fixed capital formation, due largely to declining spending on durable equipment has been in the negative in the last four quarters. This trend signifies a wait-and-see attitude among the country’s factory managers, an indicator of lack of investor confidence. These figures simply validate the latest export figures showing that purchases of capital equipment are down. It seems like businesses are waiting for politics to settle down before they decide to expand operations.

Three—government’s expectations on the supposed rebound in construction maybe misplaced. Neda says a significant part of the money that will be used to prime the economy will come from the higher EVAT rate. What if government collections, owing to corruption at the BIR, would not rise? (For a personal take on the world, please visit Photographs and Memories).