The Philippines: The Continuing Story of a Crisis-Prone Economy

Southeast Asian Affairs 2005 THE PHILIPPINES The Continuing Story of a Crisis-Prone Economy Cielito F Habito Being an election year, it was commonly expected that the Philippine economy would grow faster in 2004 compared to the year before. In fact, the expectation was more than realized. Not only did actual economic growth as measured by growth in gross domestic production (GDP) exceed that of 2003, it also went beyond the targets setby the government for the year. Moreover, the economy's growth compared favourably with that of most of its neighbours in the region. But GDP growth was only one yardstick for the economy. The quality of the growth achieved was put to question by a significant acceleration in prices and increased joblessness within the year. Meanwhile, the government's precarious financial position owing to heavy indebtedness continued to be the weakest link in the economy, prompting economists from the University of the Philippines (UP) to sound the alarm by the third quarter that the country was in the midst of a fiscal crisis threatening to turn into an Argentina-style collapse, unless the government took prompt corrective actions.1 The alarm resonated and dominated discussions and debates for the rest of the year. But the government response was far from adequate by most assessments, including and especially by the international credit rating agencies. By year-end, Fitch Ratings and Standard and Poor's had announced widely expected one-notch downgrades on the country's credit rating, telling the world, in effect, that the country's ability to pay for its debts was getting more and more Cielito F Habito is Professor in the Department of Economics and Director of the Ateneo Center for Economic Research and Development (ACERD), Ateneo de Manila University, The Philippines. 314Cielito F Habito questionable. These moves were seen as formal expressions of the external audience's dissatisfaction with the way the Philippine government was addressing current threats to the stability of its economy. But contrary to most analysts' prognoses of dire effects arising from such downgrades, the opening weeks of 2005 saw a surging stock market and a fast appreciating peso, seemingly reflecting improved, not worsened, confidence in the domestic economy. In a moment of jubilation, President Gloria Macapagal-Arroyo declared that the economy was "on a roll". But the euphoria was promptly dampened by a severe two-notch credit downgrade by Moody's in February, further confusing the already mixed signals on the economy. What was the real state of the Philippine economy, as it ended 2004 and entered 2005? A Half-full Glass: The Good News In spite of the negativity that has tended to dominate most discussions on the Philippine economy of late, the full year 2004 report on economic performance based on the government's official statistics actually brought much good news. The surging stock market and the improving peso that greeted the opening weeks of 2005 are part of this, but there are more fundamental positive indicators that could partially explain these favourable market trends. Faster production Economic growth in 2004 actually exceeded targets set for the year, as well as actual performance in the previous year. The 6.1 per cent growth in both GNP and GDP overshot the 5.0-5.7 per cent targeted by the government, and improved on the 5.5 per cent growth achieved in 2003. A breakdown of growth performance by major sectors reveals the same situation. Services, which grew fastest at 7.3 per cent, went beyond the target range of 5.7-6.6 per cent, and improved from its 5.9 per cent growth in 2003. Industry, with its 5.3 per cent growth, likewise went over its 4.4-5.2 per cent target and bested its 3.0 per cent performance in 2003 (which at the time fell short of the targeted 3.2-3.7 per cent). Even agriculture with its 4.9 per cent growth was near the upper end of the targeted 4.0-5.0 per cent range, and had accelerated from its 3.9 per cent performance. Particularly noteworthy was industry's substantial pick-up in growth, having improved by a hefty...