Fundamentally weak

But a deeper analysis of the economy would reveal that everything is not as rosy as it seems.

The seeming strengthening of the peso is not an effective gauge of the health of the economy. In fact, it was actually caused by the weakening of the U.S. dollar, which, according to IBON Foundation has been declining since the middle of 2006. In fact, most Asian currencies have been appreciating compared to the U.S. dollar. And it is only the exchange rate of the peso to the U.S. dollar which posted a significant decrease. The exchange rate of the peso to the Euro has been hovering from P61 – P 76 since 2003. It sharply increased in 2002 and 2003 from P45.3949 in 2001 to P55.1136 in 2002 to P69.3779 in 2003. It was pegged at P62.27 in June 2007.

Furthermore, the peso is being propped up by remittances from overseas Filipino workers (OFWs), which reached $12.7 billion in 2006 and $5.918 billion from January to May 2007, and foreign investments which amounted to $2.3 billion in direct foreign investments in 2006 and $3.2 billion net portfolio investments.

Among these, only foreign direct investments contribute to the productive capacity of the economy. But its contribution to the economy is questionable because of the tax holidays provided to them, their right to repatriate their profits and capital anytime, and their practice of transfer pricing, where the mother company overprices exports to the local subsidiary to siphon out their profits. Added to this, these do not make a significant impact on the unemployment problem.

Portfolio investments go mainly to the stock market, 78 percent during the first quarter of 2007, to the purchase of government bonds, and to real estate. The stock market, being mainly a secondary market, is actually a misnomer as investors do not really buy stocks of corporations but engages in the buying and selling of stock certificates. Thus, it has no impact on the formation of industrial capital and the improvement in the productive capacity of the Philippine economy, nor in the generation of employment. It merely makes available, albeit temporarily, foreign exchange for the importation of the needs of the economy. But it is very volatile as portfolio investments are highly mobile and can be pulled out anytime especially with the computerization of financial transactions.

OFW remittances, on the other hand, are spent mainly for consumption and housing. It makes an impact on personal consumption expenditures, which is one of the measures of growth in the economy, and props up the value of the peso and the foreign international reserves of the country. OFWs are called modern-day heroes because without their remittances the country would have fallen deeper into debt; the value of the peso would have plunged and the country’s gross international reserves would have been depleted as the value of the country’s imports always exceeds its exports, thus the chronic trade deficit; and personal consumption expenditures could have slowed down as the purchasing power of majority of the Filipino people keeps on going down not only because of inflation but mainly because of massive unemployment and underemployment, which have been registering double digit figures for the past six years of the Macapagal-Arroyo administration, and the worsening poverty situation. But remittances do not factor into capital formation, thus, do not contribute to strengthening the fundamentals of the economy.

Wrong orientation and direction

An economy with strong economic fundamentals should be able to achieve sustained not temporary growth; it should be able to weather the vicissitudes in the world economy; and it should be able to produce the needs of the domestic industry and market.

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