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2007 GDP seen growing at fastest rate in 30 years

By Rocel Felix
Thomson Financial
First Posted 16:37:00 01/25/2008

MANILA, Philippines -- The Philippine economy likely expanded at the fastest rate in 30 years in 2007, but a faltering US economy may temper growth in 2008, economists said.

The gross domestic product figures will be announced on Jan 31.

Despite the volatility in financial markets the economy proved resilient last year, buoyed by brisk remittances from Filipinos working overseas which spurred domestic demand, increased government spending, a healthy services sector and a sturdy farm sector, all of which offset slower exports, economists said.

Economists polled by Thomson Financial are expecting annual growth of 6.5-7.0 percent in 2007, with fourth-quarter growth of 5.8-7.0 percent.

They are expecting 2008 growth of 5.1-7.0 percent.

The government said Friday that the economy likely expanded 6.9-7.3 percent in 2007, with the fourth-quarter growth accelerating to at least 6.9 percent.

The government is looking for GDP growth of 6.3-7.0 percent for this year.

Last year's growth momentum was due to "the strength of solid macroeconomic fundamentals [which were] the best in 30 years," the central bank said this week.

"[The growth] was realized through prudent macroeconomic policies and continued structural reform efforts. Broad-based economic expansion was achieved in a low inflation environment," it said.

Hefty remittances, which encouraged robust domestic consumption, along with steadfast growth in farm output, compensated for slower exports, economists said.

"We had a very strong first half last year. It has slowed a bit in the second half on uncertainty over the US economy, but robust dollar remittances sustained the growth story," said Jonathan Ravelas, an economist at Banco de Oro-EPCI Inc.

From January to November, dollar remittances by Filipinos working abroad rose 14.1 percent from a year before to $13.1 billion.

The central bank expects remittances coursed through banks to hit $14.3 billion in 2007, 10.8 percent more than the $12.9 billion sent home in 2006.

Remittances peak before Christmas as more than eight million Filipinos overseas send more money to their families at home to spend for the holidays.

These inflows are also strengthening the peso, which last year gained 18.8 percent against the US dollar.


The economy was also boosted by a resilient farm sector, which endured a prolonged dry spell to record 4.7 percent growth, within government's projected growth range of 4.5-5.0 percent.

Agriculture accounts for about a fifth of the domestic economy.

The government said agriculture grew 5.7 percent in the fourth quarter, faster than the 1.6 percent expansion a year before. The boost came from a late surge in production of rice and corn, the country's major food crops.

"Domestic demand continued to be strong in the last quarter. We expect strong agriculture growth to be the supply-side driver of GDP growth," said Prakash Sakpal, an economist at ING.

The typical acceleration in exports in the last quarter "is likely to make net exports less of a drag in GDP growth," he said.

In the first 11 months of last year exports rose just 4.8 percent from a year before. The reduced target for the whole year is 8 percent.

Electronics exports, which accounted for 61.3 percent of total export earnings in November, fell to 2.42 billion dollars from 2.54 billion dollars a year earlier.

"The steady appreciation of the peso has been hurting the competitiveness of Philippine exports," said David Cohen, chief economist at Action Economics Asia in Singapore.

"As a result, China and other Asian exporters are getting more of the export activity."

While the economy breezed though the tumult in the financial markets last year, there will be more headwinds in 2008, some economists said.

"The external environment will be quite challenging. We are seeing a modest deceleration of the economy as a result of slower export growth, a softening of domestic consumption partly due to rising inflation and partly due to a gradual deceleration of remittance growth," said Frederic Neumann, an economist of HSBC in Hong Kong.

HSBC is projecting 5.9 percent GDP growth in 2008.

But the country's improving fundamentals should cushion some of the external shocks, Neumann said.

"What is remarkable, unlike previous downturns, is that the Philippine economy's sound fundamentals will enable it to better ride out his year's tough environment."


Economists agree that a recession in the US will be a drag on the Philippine economy.

The Philippines, despite having diversified its export markets, still considers the US its main trading partner.

"Exports will likely struggle in the first half as demand for electronics could exhibit a downturn on the back of slowing consumer demand, a consequence of the weakness in the US which, if it continues, will also hit the global economy," said Neumann.

Aside from being a key export market, the US is also home to the lion's share of overseas-based Filipinos who send money home.

"A weakness in global demand will shrink the growth in remittances. It will take a bit of the steam out of remittance growth," said Neumann.

Other economists have a more positive view.

"The picture is cloudy, but the recent moves by the US government and the Fed should make an impact in the coming months," said Cohen of Action Economics.

The Philippine government's push for increased spending this year should mitigate the effects of a global economic downturn, said Ravelas of Banco de Oro-EPCI.

"Fiscal pump-priming activities should help temper the uncertainty because of increased global risks," he said.

The peso's strength, the government's healthier finances, a credit rating outlook upgrade and low interest rates should also reduce the vulnerability of the economy.

Moody's said Friday its outlook for the Philippines' key credit ratings and ceilings has been upgraded to positive from stable because of progress in stabilizing public-sector finances and the government's easing dependence on external financing. Consequently, Moody's also upgraded the outlook for its ratings for eight Philippine banks to positive from stable.

The following are the forecasts for fourth-quarter, 2007 and 2008 GDP growth given by five economists.

-- Action Economics - 6.3 percent, 6.9 percent, 5.5 percent
-- Banco de Oro-EPCI - 6.5-7.0 percent, 6.5-7.0 percent, 6.5-7.0 percent
-- CIMB-GK - 5.8 percent, 6.7 percent, 5.1 percent
-- HSBC - 6.4 percent, 6.9 percent, 5.9 percent
-- ING Bank - 6.5 percent, 7.0 percent, 6.2 percent

Copyright 2008 Thomson Financial. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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