Country Report Philippines Philippines at a glance: 2005-06 OVERVIEW On July 1st the Supreme Court decided to suspend the implementation of an act raising value-added tax (VAT) and corporate income tax, pending a ruling on its constitutionality. This threatens to throw off course the government’s fiscal deficit reduction programme. The VAT act, coupled with higher inflation and increased power and transport tariffs, has deepened the unpopularity of the government led by the president, Gloria Macapagal Arroyo. Plans to move from the current presidential system to a parliamentary-style republic will come to the forefront of politics later in the year. Despite political problems, GDP growth will remain reasonably healthy at 5.1% this year and 4.8% in 2006, supported by continued strong inflows of workers’ remittances. Key changes from last month Political outlook • A demonstration on June 24th in the capital, Manila, by several thousand people calling for Ms Macapagal Arroyo’s resignation highlighted the increase in political pressure on the government, amid fresh accusations of electoral fraud in the May 2004 presidential election and corruption allegations that have touched the presidential family. However, the small numbers taking part in such demonstrations so far indicate that the president is likely to survive in power. Political instability will, however, need to be countered by careful cultivation of the government’s supporters within the upper ranks of the armed forces. Economic policy outlook • The achievement of a 12.4% year-on-year reduction in the budget deficit in January-May, even before the hoped-for extension of VAT, points to a significant improvement in the public finances in 2005-06. The Economist Intelligence Unit continues to forecast a budget deficit of around 3.1% of GDP this year; a fall to 1.8% in 2006 is likely on the assumption that further revenue-raising measures will come into force in January next year. Economic forecast • A modest improvement in export and import data in April points to a moderate increase in external trade over the forecast period. In view of data released so far, we now expect a narrowing of the merchandise trade deficit this year, followed by a slight widening of the deficit in 2006. July 2005 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. 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Philippines 1 Contents Philippines 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2005-06 7 Political outlook 8 Economic policy outlook 10 Economic forecast 13 The political scene 18 Economic policy 22 The domestic economy 22 Economic trends 27 Sectoral trends 29 Foreign trade and payments List of tables 10 International assumptions summary 10 Gross domestic product by expenditure 12 Forecast summary 21 Budget 23 Gross domestic product and gross national product 24 Gross domestic product by origin 24 Expenditure on gross domestic product 25 Consumer prices, 2005 28 Manufacturing production, 2005 29 Foreign trade 30 Leading exports, Jan-Apr 31 Imports by major categories, Jan-Mar Country Report July 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 2 Philippines List of figures 13 Gross domestic product 13 Consumer price inflation 21 Government budget outturn 23 Gross national product 27 Exchange rate 31 External trade Country Report July 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Philippines 3 Philippines July 2005 Summary Outlook for 2005-06 The Philippines seems to be entering a less stable period politically, despite the fact that the president, Gloria Macapagal Arroyo, is only one year into her six- year term. Allegations of fraud in the May 2004 presidential election have resurfaced, and the forthcoming increase in indirect taxation will add to pressures created by the increase in power and transport tariffs. Ms Macapagal Arroyo currently looks unlikely to be driven from power, but will need to cultivate the armed forces carefully. GDP growth will be lower this year and next, in line with global trends. However, the continued strong pace of the increase in remittances from overseas Filipino workers will support growth. The political scene Coup rumours have begun to circulate once again, following a call by a retired general, Fortunato Abat, for a “revolutionary transition government”. Unrest in the armed forces has been accompanied by accusations of corruption in the president’s own family. Congressional hearings are also taking place into a controversy surrounding what is claimed to be a tape recording of a telephone conservation between Ms Macapagal Arroyo and an election official discussing the vote count following last year’s presidential election. Peace talks with the Moro Islamic Liberation Front remain on track. Economic policy On May 24th a bill extending value-added tax (VAT) was signed into law by Ms Macapagal Arroyo. However, the implementation of the bill has since been suspended by the Supreme Court. Further revenue-raising legislation could be pushed aside later this year by the beginning of debate on constitutional reform. High liquidity in the local banking sector has held down Treasury bill rates. The domestic economy Economic growth slowed in the first quarter of 2005 owing to a poor agricultural performance. Inflation has remained high, boosted by energy prices. The peso has lost nearly all of the gains that it recorded earlier this year, owing to political jitters. Investment approvals by the Board of Investments have fallen sharply so far this year. Banks’ asset portfolios have improved. Foreign trade and payments Poor sales of electronic goods in the first four months of this year have dragged down exports overall. However, the balance of payments is likely to have been in surplus in the first half of this year. China is emerging as a more significant economic partner. Editors: David Webb (editor); Robert Ward (consulting editor) Editorial closing date: July 1st 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report July 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 Philippines Political structure Official name Republic of the Philippines Form of state Under the 1987 constitution, the government is based on a separation of powers between the executive presidency, a bicameral legislature and an independent judiciary The executive The president is chief executive, head of state and commander-in-chief; serves no more than one six-year term; and may approve bills passed by Congress or exercise a veto, which can be overridden only by a two-thirds majority of Congress. Cabinet appointments are subject to approval by the Congressional Commission on Appointments Legislature The Congress of the Philippines consists of the Senate (24 members) and the House of Representatives (212 directly elected members and 24 members selected by party list). Senators are elected for six-year terms and representatives for three-year terms Legal system Based on US common law; the 1987 constitution contains a Bill of Rights, and provides for a judiciary with the Supreme Court at its apex National elections May 10th 2004 (for the presidency, the House of Representatives