Philippines Business Forecast Report Q2 2008

Smoothing Over The Widening Cracks

After reaching a 1-year high of 7. % in 2007, we are forecasting Philippine real GDP growth to slow to 6. % in 2008. Fourth-quarter economic growth surprised on the upside at 7.4% y-o-y, increasing from the previous quarter's 6.6% expansion, and this robust growth momentum should be carried forward into H108. However, while domestic demand should remain supportive over the remainder of the year, a weaker external environment and a stronger currency will likely weigh on growth going forward. The key risk to our core scenario remains that of a severe recession in the US, which could shave as much as one percentage point from our current 2008 growth forecast.

We retain our view that President Gloria Macapagal Arroyo's position appears secure, despite growing unrest among the electorate over ongoing corruption allegations. Crucially, she retains the support of the military - largely ruling out a successful coup - and her allies dominate the House of Representatives, which all but precludes a successful impeachment attempt. Meanwhile, another rebel attack on foreign mining interests and reports of another foiled Islamist terror attack underscore the continuing security risks facing the Philippines. A failure to tackle these issues effectively could jeopardise the country's drive to attract much-needed foreign investment.

Although average inflation reached a 21-year low of 2.8% in 2007, price growth has been steadily rising since hitting a 2.2% low in May 2007, accelerating to a 16-month high of 5.4% in February 2008. This prompted the Bangko sentral ng Pilipinas (BSP) to leave interest rates unchanged at its March 1 meeting, and we are now looking to H208 for any further interest rate moves from the central bank. Having said that, with the BSP remaining vigilant towards containing inflation expectations, we are expecting the central bank to maintain a wait-and-see policy until the inflation outlook becomes clearer. Nonetheless, the cumulative 250bps of rate cuts since July 2007 should help to keep domestic demand well supported in 2008.

FDI remained largely flat in 2007, inching up to US$2.93bn from US$2.92bn in 2006. The central bank expects net FDI to rise to US$3.6bn in 2008, but despite substantial improvements in its investment climate in recent years, the Philippines still has a lot to do if it is to continue attracting FDI. Regulatory inconsistency and lack of transparency persist in many sectors, while regulatory authority remains weak or ambiguous. Foreign businesses often cite corruption as a serious impediment to investment, and commercial disputes are often difficult to resolve quickly or satisfactorily in the understaffed and complex judicial system. In addition, the Philippines has not adequately addressed other key issues such as poor public infrastructure.

• Executive Summary
  • Smoothing Over The Widening Cracks
• Chapter 1: Political Outlook
  • SWOT Analysis
  • BMI Political Risk Ratings
  • Domestic Politics
  • Arroyo Bolstered By economic Record
  • We retain our view that President Gloria Macapagal Arroyo's position appears secure, despite growing unrest
  • among the electorate over ongoing corruption allegations.
  • Security Outlook
  • Security issues At The Forefront
• Chapter 2: economic Outlook
  • SWOT Analysis
  • BMI economic Risk Ratings
  • Economic Activity
  • Risks To The Downside in 2008
  • Domestic demand will continue to compensate for export underperformance in 2008, but an increasingly bearish
  • picture in the US poses significant downside risks to our 6.3% growth forecast.
  • Monetary Policy
  • No Room For Rate Cuts in Q208
  • Accelerating inflation will ensure that interest rates remain on hold throughout H108.
  • Debt Policy
  • Fiscal Concerns still linger
  • Philippine external debt ratios will continue to improve as the government moves away from reliance upon
  • external financing in favour of domestic borrowing, and robust economic growth helps depress external debt as
  • a proportion of GDP.
• Chapter 3: special Report
  • Looking Beyond 2008
  • The Future Of The World, in Three Acts
  • Us: The Rebalancing Act
  • Unwinding The imbalances
  • We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US dollar and
  • subdued domestic consumption should lead to a narrowing in the US's structural current account deficit.
  • China: What if We're All Wrong?
  • Our Core scenario For China
  • We are retaining our positive headline growth projections for China across the forecast period to 2012, with
  • our expectations of the continued success of the urbanisation process and export-driven growth model
  • underpinning our assumptions.
  • Japan: immigration Key To long-Term Growth
  • Demographic Woes Portend long-Term Decline
  • Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
• Chapter 4: Business Environment
  • SWOT Analysis
  • BMI Business environment Risk Ratings
  • Business environment Outlook - Q2 2008
  • Institutions
  • Infrastructure
  • Market Orientation
  • Operational Risk
• Chapter 5: Key Sectors
  • Autos
• Executive Summary
  • The Chamber of Automotive Manufacturers of the Philippines projects vehicle sales growth of between 5% and 7%
  • in 2008, while BMI is slightly more optimistic with a forecast of 8% to take sales over 127,000 units.
  • Oil & Gas
• Executive Summary
• List of Tables
  • Table: Philippine Cabinet & Other Key Posts
  • Table: Mines in Philippines
  • Table: Economic Activity
  • Table: Monetary Policy
  • Table: Foreign Debt
  • Table: BMI Business & Operational Risk Ratings
  • Table: BMI legal Framework Ratings
  • Table: Philippines, Annual FDI Inflow
  • Table: BMI Trade Ratings
  • Table: Top export Destinations (Us$mn)
  • Table: Philippines Auto industry Production & sales (CBUs Unless Otherwise stated)
  • Table: Philippines Auto industry exports & imports (CBUs Unless Otherwise stated)
  • Table: Philippines Oil & Gas - historical Data & Forecasts