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 The
Economy In 1998 - Slow First Semester
Economic growth slowed dramatically
in the first semester of 1998 following a weak first quarter.
However, overall growth for 1998 is still projected at 1.7
percent for GDP and 2.5% for GNP. The National Statistical
Coordination Board reported first quarter GNP growth of 2.5
percent (versus 5.4 percent for the same quarter one year
ago). GDP growth fell to 1.7 percent for the quarter versus
5.5 percent a year ago. Slowdowns were recorded in all three
key sectors - agricultural output actually shrank by 3.6 percent
while services growth slowed to 4.9 percent and industrial
output expanded just 1.3 percent.
The bright spots for the economy continued to
be merchandise exports, which grew 12.9 percent in the first
quarter, largely on the strength of electronics exports (which
now account for well over one-half of the country's merchandise
exports). Net factor incomes from abroad (i.e., overseas remittances)
also jumped by 19.9 percent in peso terms, suggesting that
the peso depreciation had as much to do with the gain as actual
dollar remittances had.
In the meantime, inflation rates hit double-digit
levels by mid-year (10.7 percent in June) and are expected
to remain at or near those levels for the balance of the year.
Notwithstanding this rise, inflation will average about 9
percent for the full year.
Agriculture: Dry Spell Hurts
The prolonged dry spell since April 1997 cut down agricultural
output by 3.6 percent in the first quarter of 1998, a marked
drop compared to the 4.9 percent growth in the first quarter
of 1997. Palay (rice) harvest dropped 13.4 percent to 2.2
million metric tons in the first semester from 2.6 million
metric tons the previous year. Corn production also declined
23.5 percent to 782,000 metric tons from one million metric
tons. The Department of Agriculture has programmed to import
400,000 metric tons of rice and 300,000 metric tons of corn
this year. During the first quarter, 1.35 million metric tons
of rice and 265,000 metric tons of corn were brought into
the country. The El Niño has hit rice and corn subsistence
farmers particularly hard in Southern Mindanao. Continuing
private sector relief efforts target to feed three million
hungry people from Sultan Kudarat, Cotabato, South Cotabato,
Davao del Sur, Maguindanao, Sarangani and General Santos City.
Overall, we estimate that the gross value added
in the agriculture, fishery and forestry sector will shrink
by 5 percent in the first half of the year. The onset of rains
by June 1998, the La Niña phenomenon, and the new administration's
immediate focus on agriculture and food security is expected
to reverse the performance of the crops sector in the remaining
half of the year.
Industry: Weak Demand
Rising costs of production from high interest rates and volatile
exchange rates crippled industrial production in the first
quarter. Manufacturers ran down their inventories piled up
in the last two months of 1997, posting a 26.4 percent average
growth in net sales. The volume of manufacturing production,
however, shrank 1.3 percent - leading to retrenchment of workers.
Average monthly sales of wearing apparel, pulp and paper products,
other manufactured goods, and manufactured food products grew
54.8 percent, 46.6 percent, 36.2 percent, and 29.6 percent,
respectively, as their production volumes dropped. Food processing
accounted for 39 percent of the entire manufacturing sector.
Automotive manufacturers likewise faced weak demand as vehicle
sales dropped 56.6 percent to 20,036 units from 40,562 units
in the first six months of 1998. High interest rates make
financing car loans unattractive as banks repossess cars from
bad loans.
Financial Crunch
The economic slowdown has affected the banking sector . For
the first quarter, commercial banks' net profits dropped by
just under 5 percent while non-performing loans rose to 7.6
percent as of end-March from 6.7 percent the month before
and 5.0 percent at end-1997 according to the Bangko Sentral
ng Pilipinas. The financial sub-sector to be hit hardest is
the thrift bank sector. At least seven small banks have been
affected (Commonwealth Savings and Loan, Eastern Visayas Development
Bank, Aklan Development Bank, Orient Commercial Bank, Unified
Savings and Loan Association, Richmond Bank and the Mindanao
Development Bank). However, total bank failures account for
less than one percent of the entire banking system's assets
and are therefore not a threat to financial stability.
Yields on bellwether T-bill rates continued
to decline in the first half of the year despite the national
government's cash operations deficit. The average 91-day T-bill
rate eased down to 14.0 percent in June 1998 from 14.4 percent
in May, 15.2 percent in April, 16.6 percent in March, 17.8
percent in February, and 19.1 percent in January. Despite
the national government's projected cash shortfall by yearend,
prudent fiscal borrowing may even bring down the average interest
rate benchmark down to 14.0 percent for the entire year.
Merchandise Export Mix
At the end of May 1998, the Bangko Sentral's move to cut down
bank deposit reserve requirements to eight percent from ten
percent further brought down lending rates under the gentlemen's
agreement between the Bangko Sentral and the Bankers Association
of the Philippines adopted early in the year. Accordingly,
the prescribed spread over the bellwether T-bill rate is 1.5
percent for prime lending up to 6 percent for non-prime lending
rates. Poor economic performance in the first quarter make
the national government's target of a balanced budget or at
least a P1 billion surplus target by the end of June 1998
unrealistic. During the period, tax collections from the top
ten taxpaying companies dropped 18.7 percent to P2.1 billion
in the first quarter of 1998 from P2.6 billion a year ago.
The Comprehensive Tax Reform Program still remained largely
unimplemented during the period.
Despite implementation of mandatory reserves
in government spending, the national government's cash operations
deficit reached P15.5 billion in the first five months of
1998. Revenues reached P187.4 billion and expenditures amounted
to P202.9 billion, some of it directed to address the impact
of the El Niño phenomenon.
Unless fiscal authorities arrest the current
slippage in revenue collections and cut down on "pork
barrel" spending, the budget deficit of the national
government is estimated to reach P70 billion by the end of
1998 or two percent of estimated Gross National Product. New
Finance Secretary Edgardo Espiritu plans to raise P30 billion
from a tax amnesty program as the Department of Finance stopped
granting tax credits which cost an estimated P60 billion in
foregone revenues to the national government last year.
Inflation Inching Up
El Niño's impact on food prices, election-spending,
currency depreciation, and regional wage hikes pushed inflation
to 9.0 percent in the first half of 1998 from 5.3 percent
in the same period last year. Metro Manila's inflation rate
averaged 9.5 percent for the period from 6.6 percent. In areas
outside the metropolis, inflation reached 4.9 percent.
By commodity group, prices for food, beverage
and tobacco accelerated to 7.3 percent from 2.9 percent last
year; services, to 15.2 percent from 11.0 percent; miscellaneous
items, to 7.2 percent from 3.1 percent. Only prices in the
utilities sector decelerated to 5.5 percent from 9.9 percent
a year ago, contrary to fears sparked by the deregulation
of oil prices.
New Socioeconomic Planning Secretary Felipe
Medalla foresees average inflation rising to 9.0 to 9.75 percent
for 1998 from the Ramos Administration's inflation target
of 7.5 percent to 8.5 percent.
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