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Monitoring the Philippine Economy

Year-End Report for 2011

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Project of the De La Salle University- Angelo King Institute

By Mitzie Irene P. Conchada
Assistant Professor
School of Economics

Pressure on exports from the global economic slowdown coupled with sluggish domestic demand create lower-than-expected growth of 3.6% for the Philippine economy in 2011. Growth may slow further in 2012 if the global economy continues to display weak recovery.

  1. Economic performance
    • Philippine economy slows down in 2011 due to weaker global economy. Gross domestic product (GDP) in 2011 expanded by only 3.6% year-on-year (y-o-y), as opposed to the 7.6% y-o-y GDP growth last year; dire outlook of the country’s key trading partners and sluggish domestic growth mainly caused the slowdown.

    • Growth was lowest for the second and third quarter at only 3.1% and 3.2% y-o-y respectively, a consequence of the debt crisis in the eurozone and poor local government spending. Government spending contracted 0.2% y-o-y by the end of year, much lower than the previous year’s 4% y-o-y growth. Gross capital formation also slowed down to 10.4% y-o-y from 31.6% y-o-y for the previous year. Conversely, consumer spending grew 6.1% y-o-y compared to the previous year’s 3.4% y-o-y growth, reflecting a positive outlook from the demand side.

    • The World Bank was forced to trim down its growth forecast from 4.5% to 3.7% becasue of the country’s unimpressive performance this year. The Development Budget Coordination Committee followed, through its decision to revise its growth forecast from 5%-6% to 4.4%-5.5% for 2011. Based on the Economic Intelligence Unit, growth forecast for 2012 is at 3.4%.

    • Consumer price inflation averages higher in 2011 than previous year. The average annual inflation (based on 2006 prices) ended higher at 4.8% compared to 3.8% in 2010 due to higher global commodity prices, especially oil. Consumer prices peaked during the months of June and October, reaching 5.2%, the highest in two years. The increase came from price hikes in food and non-alcoholic beverages, resulting from poor domestic harvest after several typhoons hit the country. Inflation, however, slowed down towards the end of the year at 4.2% as prices of food and non-alcoholic beverages tapered. The production of rice also recovered in 2011, following poor domestic harvest the previous year because of the El Niño phenomenon.

    • Global economic slowdown puts pressure on Philippine exports. By the end of 2011, the country posted a trade deficit of USD1,005.6 million larger than the USD255.1 million trade deficit posted in 2010. Exports were hardest hit in September; it dropped by 26.8% y-o-y. The electronics sector registered its biggest loss due to weak demand from Europe, Japan, and the United States. Shipments of electronic products, which account for more than 51.2% of the total exports revenue in August, fell by 30.6% from a year earlier.

    • The decline was steeper than July's 21.3% fall. In September, exports in the electronics sector declined by 47.9% y-o-y. The slump in exports drove the country’s trade balance down to negative USD1,647.8 million in November, the lowest in 2011. On the other hand, imports slowed down toward the last quarter posting a negative growth of 6.1% y-o-y in December. Overall, imports grew only at an average of 10.8% y-o-y; low demand for machinery, mechanical appliances, and electrical machinery contributed to the slump.

    • Industrial production slumps to negative figures at year end. Total volume of production for the manufacturing sector followed a downhill trend throughout 2011, with negative growth reaching a high at 12.6% y-o-y in October. Top losers were basic metals, machinery except electrical, and food manufacturing. The year ended with negative growth in December. The following sectors were the top losers: machinery except electrical, food manufacturing, and paper and paper products. The ongoing financial crisis of the country’s major trading partners, as well as the series of typhoons that hit the country in the third quarter, contributed to the sluggish performance of the sector.

    • Unemployment rate drops significantly in the last quarter despite lackluster economic growth. The National Statistics Office estimated unemployment rate at 6.4% in October, lower than the 7.1% estimate last month. The number of employed persons increased in the services sector from 51.7% in October last year to 52.1% in October this year, particularly in wholesale and retail trade, finance and real estate. The National Capital Region recorded the highest unemployment rate at 10.4% while the Autonomous Region in Muslim Mindanao posted the lowest at 2.3 percent. Despite low unemployment rate, underemployment remained above the single digit level at 19.3% for 2011.

    • Stronger surplus remains for the Philippines’ external payments position. The first quarter balance of payment (BOP) was at PhP3.5 billion, a 175.7% y-o-y increase compared to the 2010 fourth quarter growth at 289.6% y-o-y.

    • The overall BOP surplus allowed the country to accumulate foreign exchange reserves. A smaller current account surplus and a smaller financial account surplus, however, contributed to the decline in the BOP surplus in the second quarter. Lower exports caused the country’s current account to drop at only 1.9% of GDP in the first quarter compared to the 3.7% of GDP recorded in the fourth quarter of the previous year. Financial account also dropped from USD5.3 billion in the fourth quarter of the previous year to only USD3.1 billion in the first quarter due to fewer direct and portfolio investments. The second quarter BOP surplus slowed down to PhP1.5 billion.

    • Last, the third quarter overall balance of payment position was recorded at USD4.7 billion, higher than the 2010 USD3.3 billion registered amount, mostly due to a higher surplus in the capital and financial account. Capital and financial account stood at USD2.2 billion, with a positive net inflow of USD0.7 billion for portfolio investments; net outflow of foreign direct investments registered at USD0.09 billion. Meanwhile, current account remained at 3.7% of GDP due to weak trade-related activities.

    • Gross international reserves continue to improve. Total reserves (less gold) remained strong by the end of the year with an average of USD63.3 billion. Peso appreciation and income from investments abroad of the Bangko Sentral ng Pilipinas caused the surge in reserves. Total reserves grew by 21.5% y-o-y in December, slightly lower than the previous month’s 27.0% y-o-y growth.

  2. Policy responses
    • Bangko Sentral ng Pilipinas reduces policy rate the fourth time this year. In its meeting last October, the BSP decided to cut down its key policy rate by 25 basis points bringing interest rate down to 3.5 percent. The expansionary monetary policy aims to maintain the economy’s robust growth and stable prices.
    • President Aquino signs Sin Tax Bill into law. To curb consumption of tobacco and alcohol products and increase revenue, legislation ratified the Sin Tax Bill last November and was sigend by the President into law last December 20. The new law is eyed to bring additional revenue to as much as Php34 billion and will be implemented next year. Moreover, the law’s passage could improve the country’s investment grade.
  3. Other economic news
    • The Philippines receives higher investment grade in July. The country’s credit rating improved from BB to BB+, one notch below investment grade. This is due to the robust economic performance and promising fiscal revenue amidst global economic slowdown. Investors’ confidence is seen to improve positively affecting appetite for foreign and local currency long-term bonds – a good signal especially to foreign investors and creditors.
    • The Private-Public-Partnership program of the government continues to raise its number of projects. To date, the government has rolled out eight PPP projects. One of them is the partnership between Department of Education and Megawide Corporate which recently sealed a Php16.3 billion project to build 9,301 classrooms as part of the School Infrastructure Project. Moreover, the Department of Transportation and Communications has announced its plans to take over LRT1 Cavite Extension Operation and Maintenance.
    • Philippine remittance hits USD1.9 billion in October. The Bangko Sentral ng Pilipinas announced that cash remittance amounted to USD1.9 billion on October alone, bringing the cumulative amount for the year to USD17.5 billion. Despite the tenuous economic conditions in advanced economies and geopolitical tensions in some Middle East countries, remittance flows remained strong. This could be attributed to the steady deployment of skilled and professional Filipino workers coupled with commercial banks’ continued efforts to strengthen its network with remittance business partners.
  4. Future challenges
    • US fiscal cliff raises concerns in the domestic and global economy. Legislators in the United State must reach a deal before January 1, 2013, when the fiscal cliff is about to happen. The fiscal cliff pertains to the automatic increase in taxes and spending cuts which may be a dangerous combination for a recession that may have global consequences. A new tax bill should be enacted to avoid the fiscal cliff; however there is an ongoing debate on whether tax rates should increase or not for those in the top income bracket.