The business community’s outlook on the Philippine economy is somewhat tempered for 2005, notwithstanding the strong economic growth in 2004.

Almost 40% of senior business executives polled in the Makati Business Club’s January 2005 Executive Outlook Survey believe that the country’s GDP growth rate will slow down this year. At the same time, over a third of respondents project the economy’s growth will remain the same as last year. Only 23% expect the economy to grow faster than last year. The country’s domestic economy grew 6.1% in 2004 from 4.7% in 2003.

The cautiousness seems to be partly anchored on the forecast for inflation and interest rates. About 73% of executives polled expect a higher inflation rate this year. Inflation rose to 5.5% in 2004 from 3.0% in 2003. Another 76% predict a higher average rate for the interest rate benchmark, the 91-day Treasury bill. The 91-day T-bill rate rose to 7.352% in 2004 from 6.034% in 2003. And in spite of the appreciation of the peso early in the year, 60% expect the peso-dollar rate to depreciate 5.6% over the next 12 months.

While prospects for investments and trade remain positive in 2005, the mood is not as bullish as in 2004. The number of executives expecting higher investments and growth in exports and imports is running considerably lower than at the beginning of 2004. Nearly 46% expect higher investments in 2005. Another 53% forecast higher exports this year while 60% likewise project higher imports.

CORPORATE OUTLOOK

The corporate earnings reports for the full year will be somewhat tempered for many companies. In the July 2004 survey, the vast majority – from 75% to 87% expected revenue and income growth in 2004. That number has now dropped significantly in the January 2005 survey to only 44% to 57% expecting gross revenue and net income growth. It should be pointed, though, that among the companies expecting a rise in revenues and income, those increases are expected to be dramatic. Notwithstanding that, most companies have downgraded their own expectations for net income for 2004.

Looking ahead to 2005, 73% of respondents project corporate revenues to grow at an average of 15.6% while 60% expect corporate net income to grow at an average of 27.2% on a year-on-year basis.

The outlook for labor should remain reasonably stable. Sixty percent of respondent companies plan to hold their current workforce size steady (compared to 64% in July last year) while over 27% will expand their workforce. On the other hand, close to 6% plan to layoff or downsize their workforce this year.

The outlook for investments is also fairly moderate. Only 47% of respondent firms plan to make additional investments this year, compared to over 71% last year. However, the average investment will be significantly higher than year-ago levels. One factor behind the moderate investment activity may be the drop in capacity utilization rates for manufacturing companies. Manufacturers in the survey reported a decline in the average capacity utilization rate to 67.8% in end-December 2004 from 76.9% in end-May 2004.

GOVERNMENT PERFORMANCE

Senior business executives have once more rated the Bangko Sentral and the Department of Trade and Industry as the top two performing government agencies among 36 government offices in the second half of 2004. Indeed, while the Bangko Sentral has kept its policy interest rates stable, the Department of Trade and Industry has reported better than expected growth in approved investments last year. Their net scores, however, dropped to 68.5% and 61.4% respectively, since July 2004.

The Department of Social Welfare and Development and the Department of Foreign Affairs ranked third and fourth place. The Department of Agriculture and the Department of Budget and Management were tied for fifth place. Both DFA and DBM improved their ratings while DA dropped two places to fifth.

The House of Representatives, Senate, Department of Environment and Natural Resources, Department of Public Works and Highways, and the Commission on Elections were all ranked the worst performing agencies of government in the last six months.

The most improved government agency in the past semester was the Department of Budget and Management, which rose to No. 5 from No. 17 in the survey and saw its net satisfaction ratings rise to 38.6% in January 2005 from 11.5% in July 2004.

The government agencies whose net scores deteriorated the most were the following: the Department of Tourism (down 60.3%), the Supreme Court (down 36.6%), Armed Forces of the Philippines (down 36.1%), Department of Environment and Natural Resources (down 29.4%), and the Metro Manila Development Authority (down 29.3%).

In the second half of 2004, President Arroyo implemented changes in her Cabinet. Vice President Noli de Castro took over as Chair of the Housing and Urban Development Coordinating Council from Secretary Michael Defensor. Environment and Natural Resources Secretary Michael Defensor replaced Secretary Elisea Gozun. Agriculture Secretary Arthur Yap succeeded Secretary Luis Lorenzo Jr. Foreign Affairs Secretary Alberto Romulo replaced Secretary Delia Albert. Justice Secretary Raul Gonzalez succeeded Secretary Merceditas Gutierrez. Interior and Local Government Secretary Angelo Reyes succeeded Secretary Jose Lina. Defense Secretary Avelino Cruz Jr. replaced Secretary Eduardo Ermita, who became Executive Secretary. Land Reform Secretary Rene Villa replaced Secretary Jose Mari Ponce. Tourism Secretary Joseph Durano replaced Officer in charge Undersecretary Oscar Palabyab. Education Secretary Florencio Abad replaced Secretary Edilberto de Jesus.

At the Bureau of Customs, Commissioner George Jereos succeeded Commissioner Antonio Bernardo. At the Securities and Exchange Commission, Chairperson Fe Barin replaced Chairperson Lilia Bautista. At the Philippine National Police, PNP Chief Director General Edgardo Aglipay succeeded PNP Chief Hermogenes Ebdane Jr. In the Armed Forces of the Philippines, Chief of Staff General Efren Abu replaced Chief of Staff General Narciso Abaya.

Business executives gave positive net scores to 12 out of 35 agencies for their performance in the second semester of 2004, down from 17 agencies which received positive net scores for their performance in the first half of 2004. The net scores of the Armed Forces of the Philippines, Department of Tourism, Department of National Defense, Department of Science and Technology, and the Metro Manila Development Authority have turned into negative from positive.

DEVELOPMENTS AND ISSUES

The semestral survey regularly tracks developments and issues over a 6-to-12 month window. Among the major developments cited in the second half of last year were the government’s decision to expropriate and operate NAIA 3, the passage of the sin tax law (RA 9334), the Supreme Court’s reversal of its ruling on the Mining Act, peace and order, and political stability. The government has promised to open the airport within six months and has also pursued other tax measures in order to bring the fiscal position into balance over the next several years.

Among the major issues which businessmen were asking the government to immediately address were revenues and the fiscal deficit, graft and corruption, peace and order, infrastructure, and investments.

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