Country Report Philippines July 2008

Outlook for 2008-09

• The authority of the president, Gloria Macapagal Arroyo, is fragile, owing to allegations of government corruption. However, she retains the support of top army officers and should manage to complete her term, which ends in 2010.
• Despite her weak position, the president will continue to push ahead with plans to reform the constitution. She is keen to see a switch from the current presidential, bicameral system to a parliamentary, unicameral arrangement.
• The budget deficit will widen in 2008, as the government looks to support poor families amid rising food and fuel prices. The president aims to eliminate the budget deficit by 2010.
• The pace of economic growth is expected to slow to 4.8% in 2008, from 7.2% in 2007, owing to weaker external demand and soaring inflation. A recovery is expected in 2009, with GDP expanding by 5.7%.
• In view of the latest consumer price inflation data, the Economist Intelligence Unit has revised its inflation forecast for 2008 to 8.3%, from 6.8% previously.
• The peso was the strongest-performing Asian currency in 2007, but rising risk aversion among global investors, together with high inflation and slowing economic growth, will weigh on the currency in 2008-09.
• The trade deficit will deteriorate in 2008, but large remittances from Filipinos working overseas, together with a healthy balance on the services account, will ensure that the current account remains in surplus in the forecast period.

Monthly review

• The government has intensified its onslaught on one of the Philippines' leading business families, the Lopez family, which controls the Lopez Group, highlighting the politicised nature of economic policymaking in the country.
• The government has announced a set of measures to sustain the purchasing power of households that have been hit by the surge in food and fuel prices.
• Real economic growth was 5.2% in the first quarter of 2008, the slowest rate of growth since the third quarter of 2006. Weak exports were the main cause of the slowdown.
• Year-on-year consumer price inflation rose in May for the seventh month in succession, to a nine-year high of 9.6%.
• The peso depreciated against the US dollar in every month of the second quarter, and on June 30th it was down by 7.5% from the beginning of the year.
• The current-account balance came in at US$1.2bn in the first quarter of 2008, down from US$2bn in the same period of 2007, reflecting a sharp deterioration in the merchandise trade balance.