No. 70 - October 2005
The First Three Quarters of 2005
Grading the Economy
By Michael B. Mundo

Weak Output

The domestic economy’s expansion slowed down to 4.7% in the first semester from 6.4% a year ago. This performance is way below the full year government low-end GDP growth target of 5.3%. GNP likewise grew at the same rate from 6.8% last year. The dry spell contracted agricultural production (which accounted for 17.4% of GNP), including palay harvests, by 0.7% from last year’s 6.2% expansion. Industry (which accounted for 30.4% of GNP) slowed down to 4.4% from 5.0% despite improved performance of the manufacturing subsector. Services (which accounted for 44.4% of GNP) expansion also decelerated to 6.5% from 7.4% although finance and real estate subsectors grew at a faster pace.

On the demand side, overall domestic demand growth slowed down to 3.0% from 5.6%. High oil prices pulled consumer spending growth down to 4.9% from 6.0%. Capital formation turned around with a 5.5% drop from a 5.7% rise last year. Government spending grew faster at 7.1% from 1.3% a year ago with an election spending ban. Meanwhile the decline of net exports narrowed down to 13.7% from 18.4% a year ago.

Fewer New Jobs

On the labor front, the country’s average unemployment rate fell to 11.7% in the first three quarters from 12.1% in the same period a year ago. The ranks of the jobless also shrunk by 2.2% to 4.27 million from 4.37 million. But since the Philippines has adopted International Labor Organization standards, the official unemployment rate slightly rose to 7.8% from 7.7%. The number of unemployed people swelled by 2.9% to 2.7 million from 2.62 million.

The average number of new jobs generated decreased by more than half to 555,000 from 1.24 million. The number of employed workforce increased by 1.8% to 32.12 million from 31.57 million. Those who are employed in agriculture, fishery, and forestry went up by 1.9% to 11.45 million from 11.23 million. The number of employed in industry sector increased by 0.6% to 5.07 million from 5.04 million. The number of employed in the services sector gained by 2.1% to 15.61 million from 15.29 million.

The number of overseas Filipino workers deployed abroad also rose 5.2% year-on-year to 599,196 in the first seven months. In the same period, their remittances grew 22.1% year-on-year to US$5.8 billion from US$4.7 billion a year ago.

Rising Fuel Prices

As the jobless rate expanded, the country’s headline inflation rate also accelerated. Consumer prices jumped by 7.9% in the first nine months compared to 5.2% in the same period a year ago. This is on track with the Bangko Sentral’s revised inflation projection of 7.9%. Meanwhile, the underlying inflation rate also worsened to 7.4% from 5.1%. The average inflation rate in the first nine months reached 7.9%, compared to 5.2% a year ago. As the benchmark Dubai crude oil prices surged by 45.9% to an average of US$48.10 per barrel in the first nine months from US$33.00 per barrel a year ago, domestic pump prices of fuel products likewise continued to rise, by as much as P1.50 per liter on an average in recent months. Wholesale prices of unleaded gasoline rose by 27.5% to P33.71 per liter in September from P26.43 per liter a year ago. LPG costs also went up by 10.3% to P403.60 per 11-kilogram tank last month from P365.95 per 11-kilogram tank.

Low Interest Rates

Coupled with an accelerating growth in domestic liquidity of 13.6% in July, rising oil prices abroad also threatened to exert supply-side pressure on consumer prices, prompting the Monetary Board to raise the Bangko Sentral’s key interest rates by a quarter of a percentage point last month, as it did last April. The overnight borrowing rate is now at 7.25%, while the overnight lending rate is now at 9.5%. On the other hand, the bellwether average 91-day Treasury bill rate averaged 6.435% in the first nine months, lower than the 7.175% weighted average rate last year.

Narrower Deficit

Part of the reason for lower interest rates is the shrinking fiscal deficit of the national government, which went down to P80.8 billion in the first eight months from P111.1 billion a year ago. The government expects to meet its P180.0 billion ceiling even though newly legislated revenue measures – the attrition law, the sin tax law, and the new expanded value-added tax law — failed to have an immediate impact on collection performance, particularly of the Bureau of Internal Revenue and the Bureau of Customs. In fact, the national government posted monthly surpluses last April, June, and August. Overall revenues expanded by 14.6% to P530.2 billion from P462.4 billion with better than expected income from the Bureau of the Treasury. Abroad, Fitch, Standard and Poor’s, and Moody’s brought down their ratings outlook on long-term foreign currency Philippine debt to negative from stable following the freeze in the implementation of the new expanded value added tax law (Republic Act 9337) since 1 July and the resignation of key members of the economic team last 8 July.

On the other hand, public spending also widened by 6.5% to P611.0 billion from P573.5 billion. Increasing interest payments on National Power Corporation’s debts which were assumed by the national government this year, meanwhile, started to threaten the government’s expenditure program. The entire public sector also suffered from a lower shortfall, which reached P41.6 billion in the first half from P94.2 billion a year ago. The national government debt stood at P3.9 billion as of end-June. On the other hand, the entire obligation of the public sector reached P5.3 trillion as of end-March.

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