Philippines Economic Situation

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Andrew Matheson
11:19am Sunday 29 November

Philippines Economic Situation

The Philippines is a developing country with a diversified economy, reflecting its varied resource endowment, both physical and human. Important sectors of the economy include services (54.5% of GDP) agriculture (13.8% of GDP) and industry (31% of GDP), particularly food processing, textiles and garments, and electronics and automobile parts. The best performing sectors in recent years have been in services, and in particular the financial sector, which had been boosted by strong inflows of remittances through the banking sector, and trade, which has been buoyed by strong growth in household spending. Mining is also of great potential and mining investment has risen considerably in recent years. Despite, the global economic climate, the Philippines economy has proven to be resilient and in 2007 grew by a near record rate of 7.3%.

In November 2005 a newly expanded Value Added Tax (VAT) law was instituted in an attempt to restrain the growing foreign debt and to improve government services such as healthcare, education, social security, and transport. This boosted confidence in the government's fiscal capacity and helped to strengthen the peso. The peso continues to strengthen against the US. This VAT reform boosted 2006 tax revenue by 22%. The improvement in the government's fiscal position has allowed strong growth in government spending in recent years, but government consumption spending only accounted for 9.7% of GDP in 2007.

In 2005 sluggish exports, high oil prices, and a weak agricultural sector saw GDP decrease to 5%, from 6.2% in 2004. However, GDP growth in 2006 (to 5.4%) and further growth in 2007 (to 7.3%), fuelled by increased electronic exports, growth in the outsourcing industry, and the increase in remittances from overseas workers, has helped fuel the economy. Strong private consumption growth, which accounted for 6.94% of GDP in 2007, has also contributed to some strengthening of the Philippines economy. However, a fall in exports in the first quarter of 2008 and a slowdown in private consumption growth, as households were hit by higher energy and food prices, reduced year-on-year GDP growth to 5.2% in January to March. Whereas the deficit on merchandise trade has risen in recent years, the current account balance has consistently strengthened, moving from a moderate deficit of US$2.2billion in 2000 to a comfortable surplus of US$6.4billion in 2007. The US and Japan were the Philippines two biggest export destinations, and main origins of imports last year.

Both the pace of economic growth and its potential have been held down over recent decades by the low level of investment, especially as compared with other Asian economies which have enjoyed a high level of investment. A number these economies have achieved investment to GDP ratio of 25-30% during their periods of strongest growth, while in China, the ratio exceeded 40% in 2007. By contrast, the ratio in the Philippines was just 14.8% of GDP. Unemployment levels are high at 8%.

The Philippines will have to tackle several significant problems in the future. Income inequality remains an issue, regional development is uneven, and China and India have emerged as major economic competitors. This combined with a forecasted decline in economic growth; increased inflation; and a deteriorating trade deficit, will provide particular economic challenges. Fiscal constraints continue to limit Manila's ability to finance infrastructure and social spending.

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Last updated: 04 December 2008