Economy Manages Growth, In Spite Of Challenges
(21/12/2001)

In spite of numerous challenges and unforeseen events, the Philippine economy managed to grow, albeit at a slower pace than in 2000. The Makati Business Club estimates that the economy will expand by a modest 3.2 percent in gross domestic product (GDP) and by 3.3. percent in gross national product in 2001. Growth will mainly be pulled by the services sector (up 3.6 percent) and the agricultural sector (up 3.1 percent after a strong first semester). The industry sector continued to face difficulties this year with marginal growth of just 2.6 percent as demand tapered and capacity utilization dropped. (View Economic Outlook Table)

While the public mood started on a relatively upbeat mode following the ouster of former President Joseph Estrada in January and the succession of President Gloria Macapagal-Arroyo, several domestic and external factors combined to present difficulties for the Philippine economy. The onset of an economic recession in the United States and a continuing recession on Japan plus a downturn in the electronics industry resulted in an estimated 13 percent decline in Philippine manufactured exports and a 35 percent drop in foreign direct investments for the first eight months of the year. Moreover, the September 11 terrorist attacks on New York and Washington and the resulting conflict aggravated an already-bad situation and increased the risks for a global recession.

On the domestic front, the largest obstacle to economic take-off and the biggest challenge to the economy did not appear to be a purely economic factor. The major concern for investors and consumers alike was a deteriorating peace-and-order situation illustrated by a perceived rise in serious crimes such as kidnap-for-ransom cases. Other issues which continued to draw concern were graft and corruption and the penchant for political bickering among opposing political forces which appeared to steer attention away from pressing economic issues.

In spite of these challenges, a number of key accomplishments and positive developments occurred which were somewhat overshadowed. Three major pieces of legislation were enacted into law - the Solid Waste Management Act, Electric Industry Power Industry Reform Act, and the Anti Money-Laundering Act. While the legislation sets the stage for key reforms in all three areas, implementing rules and regulations for the Power Reform Act and the Anti Money-Laundering Act are still pending in Congress.

Also overshadowed by the spate of negative news were favorable world crude oil prices which resulted in a series of price reductions at gas stations, the commissioning of the Malampaya natural gas field which sets the stage for cleaner fuels for up to 25 percent of the country's electricity by early next year, and the continued strong growth in the emerging e-services and IT-enabled services sector which has generated thousands of jobs.

For 2002, MBC forecasts 3.2 percent GDP growth and 3.4 GNP growth. We believe that the foundations for recovery and growth have been built, particularly in the areas of the budget deficit management and the proposed reforms in the procurement and expenditure processses of government. Moreover, a return of the electronics exports market and the beginnings of a global economic recovery sometime around mid-year 2002 signals the strong possibility of some recovery for the Philippines as well. Possible growth drivers for next year include the privatization of the electric power industry, continued expansion in the telecommunications and information technology sector, and tourism (but only if the crime and infrastructure problems are addressed).

The peace-and-order situation and crime situation will continue to be the government's gravest challenge in 2002. Unless resolved, all bets for a solid and sustainable recovery are going to be somewhat impaired.