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To anyone who still remembers the promotional ploy called Philippines 2000, the reality of the economy in the year 2000 must seem like a tragic joke. The sorry performance of former President Joseph Estrada certainly contributed to the crisis of confidence that engulfed the country. But beyond that, domestic agriculture and industry were already reeling from years of runaway trade and investment liberalization and the so-called 1997 Asian financial crisis. The resulting vulnerability and backwardness of the economy should take much of the blame. Coupled with a steadily worsening global economic crisis, the country was brought to the brink of yet another bust in its cycle of chronic crisis. The deterioration of the economy will intensify in 2001 as the country's main sources of growth contract. Shrunken Investments Investments sustain and expand the economy's capacity to produce. But the investment climate gravely worsened under the Estrada administration. For one, investors were turned off because the administration's unabashed criminality, corruption and cronyism eroded its credibility to govern the country and steer the economy. For another, rising interest rates increased the cost of financing investments. Local interest rates shot up due to government domestic deficit financing and efforts to prop up the faltering peso. At one point, interest rates reached 22% for prime borrowers and up to 35% for non-prime borrowers. They remained at two-digit levels at the end of 2000 and are expected to remain high in 2001. Foreign capital has become expensive for local firms after the International Monetary Fund's (IMF) withdrawal of its "seal of good housekeeping" on the Philippines. Risk premiums for Philippine borrowers increased with the subsequent downgrading of the country's standing from stable to negative by international credit rating agencies. As a result of the uncertainty and the high costs of doing business, Bureau of Investment- and Philippine Economic Zone Authority-registered investments continued to fall and contracted by over 25% in 2000 compared to the year before. Bangko Sentral ng Pilipinas-registered foreign equity and portfolio investments from January to August 2000 plummeted 72% compared to the same period in 1999. Net foreign investments actually plummeted by a staggering 125% in the first semester of 2000 compared to the same period in 1999. Other indicators of investor jitters were the steep 30% drop in the stock market index and 53% plunge in daily turnover by year-end, and the $142.5 million net outflow of portfolio investments by mid-December 2000. Overall growth will stall as the country's infrastructure and capital stock deteriorate. Runaway Deficits The deep national government deficits will make pump-priming the economy difficult. Capital sources have dried up, there is continuing hemorrhage from widespread corruption, and the government wastes money in a reckless war against the Moro people in Mindanao. The economic slowdown also greatly cuts into revenues. The 2000 budget deficit reached P136.1 billion, more than twice the original target of P62.5 billion, and the IMF estimates that this may increase to almost P140 billion in 2001 and as much as P170 billion in 2002. Even long-term growth prospects will be compromised by falling real spending on health and education services that diminish the capacity of the labor force. The peso lost over 25% of its value, breaching the P50-$1 band at the close of 2000. External Factors Far from improving "competitiveness" and exports, the economy has been burdened by the increased cost of imports within an already adverse global economic environment. Export growth started to slow in the third quarter of 2000, from 17.2% in September 1999 to just 9.2% in September 2000. The country's import-intensive assembly of electronics, particularly semiconductors, has been hit hard by world overproduction of information-technology goods. The slowing down of import growth, especially in raw materials and intermediate goods, is ominous given the import-dependence of the domestic economy. In the third quarter of 2000, imports of mineral fuels, lubricants and related materials slowed to 3.9% from the 17.3% average in the first two quarters. Imports of machinery other than electrical machinery shrank 4.5% after the 13.6% average previously. There was a surge of 14.6% in imports of electrical machinery, apparatus and appliances from the 4.7% average in the preceding two quarters but this was heavily toward telecommunications rather than to any other domestic industrial capacity. These goods constituted 43% of total merchandise imports. Total imports (including non-factor services) in fact shrunk 1.9% in the first nine months of 2000 indicating an impending slowdown in economic activity. People Are Losing Out As always, the economic difficulties have hit the poor masses worst. Despite a GDP growth of 3.9% in 2000, the unemployment rate rose to 11.1% in 2000 from 9.7% in 1999. This means that despite the growth, there was a 450,000-person increase in unemployment compared to a year earlier for a total 3.5 million unemployed Filipinos. Taken together with the underemployment rate of 21.9%, or 6.8 million people, this translates into 10.3 million Filipinos without jobs or otherwise not earning enough for decent living for themselves and their dependents. This was due in part to the closure of 1,714 establishments and the retrenchments in January-September 2000 that affected 52,468 workers. At the same time inflation started to worsen in the last months of 2000 with the December inflation rate hitting a 19-month high of 6.6%. All these will exert downward pressure on domestic consumption. Although election-related spending may help buoy the economy in the first half of 2001, the consensus is for drastically slowed overall growth rates that are the lowest in the region. The government estimates 2001 GDP growth at between 3.0 and 3.5%. The Makati Business Club estimates GDP will be 2.7% while the Economist Intelligence Unit estimates it at 1.9% in a worst-case scenario where the political crisis is unresolved. The Federation of Philippine Industries (FPI) has been vocal in expressing alarm about the effects of an 18% increase in production costs, continuing peso devaluation, and spooked local and foreign investors. It even warned that businesses would be forced to cut back on production or shut down, lay off over 100,000 workers, and shorten working hours. (FPI has recently promised not to lay off workers but this remains to be seen.) Feeling The Pinch The industrial sector (including its pseudo-industrial subsectors such as mining, utilities, and construction) is already feeling the pinch of steep peso devaluation, rising oil prices, low investment, and depressed consumer demand. Agricultural growth can likewise only dip after reaching its limits in 2000. There is little room for backward and weather-dependent agricultural production to expand. Growth was a tepid 3.4%, a decline from the 6.0% in 1999. The overthrow of the Estrada clique from power will certainly have some benefit if only in terms of restoring some semblance of investor confidence. But the turmoil due to Estrada's incompetence, criminality and intransigence, in fact, only aggravated the long-standing weaknesses of the economy. The persistence of the anti-national and anti-people policies of globalization that undermine the domestic economy is more basic and needs to be resolved. That means national industrialization and genuine agrarian reform. As it is, the economy will likely worsen further in 2001 as the disruptions in 2000 assert themselves and as global economic activity slows. Real improvements in the lives of the majority will be a long time coming. # |