The Philippines: Year in Review 2011

The Philippines may be heading towards a period of economic introspection, looking inward for growth and stability as the shadow of slower economic growth appears to be spreading over many of its key trading partners. The country’s inner strength was tested late in 2011, however, by natural disaster and other domestic concerns.

As the year closed, the Philippines was still calculating the costs of Sendong, the devastating tropical storm that swept through Mindanao Island and other areas in mid-December, leaving well over 1000 dead, hundreds missing and damaging much of the key infrastructure in the region. According to some estimates, more than 25,000 homes were lost as a result of the storm, and some 266,000 people displaced. The cost of clean-up and repairs has yet to be completely calculated, though it will surely be immense, as will the losses to the economy.

Official figures put the losses from the farming sector alone at $187m, which in turn could cut agriculture exports by some 5-10%, while also reducing domestic demand and trade well into 2012. The damage to Mindanao’s agricultural sector hit rice and grain production especially hard, with the losses likely to require increases in imports to make up the shortfall.

Even before the economic impact of Sendong was determined, there were warnings being issued that the Philippines could see a slowdown in growth in 2012. On December 20 the World Bank issued its latest update on the Philippines, saying that if much of the global economy slipped back into recession, Manila would have to contend with a sharp fall in GDP growth.

The international lender said that growth could be limited to around 1% in 2012 if there was a downturn in the global economy. However, the World Bank said the effects of a widespread recession, which would result in a contraction in private and external demand, could be mitigated by fiscal stimulation from the government.

Of course, this is a worst-case scenario, and the World Bank and other agencies say that the Philippines’ GDP could expand by up to 4.2% in 2012. This will be dependant on a number of factors, including whether the country’s export markets hold up.

If the end of 2011 is any indication, the export markets could continue to slip to some degree, with exports falling 14.6% year-on-year in October, the sixth month in a row that overseas shipments had declined, according to data issued by the National Statistics Office in mid-December. Overall, from January to October, exports were down by 4.3% compared to the same period in 2010, a trend that was expected to continue through the last two months of 2011 and into 2012 as demand in some of the Philippines’ major markets is likely to remain weak for some time. With exports representing about 40% of GDP, any significant and prolonged downturn will come as a blow to the economy.

Another reason cited by the IMF for the slowing rate of growth was government under-spending on a number of major projects in 2011. However, although this shortfall in outlays may have slowed expansion in the past year, the unspent funds will give the government additional flexibility in 2012 while not adding to the public debt burden, the IMF wrote in a statement issued in mid-December.

The administration of President Benigno Aquino had intended to roll out a series of developments in 2011, many focusing on improving the country’s transport infrastructure. However, delays imposed in part by a tightening of planning and tendering processes imposed restrictions on some of these projects. Concerted efforts are expected in 2012 to push these developments forward, boosting the construction industry and helping unclog logistics bottlenecks.

In January, the Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines, lowered its key policy rates to 4.25% for overnight borrowing and maintained its 6.5% overnight lending, levels it had maintained for the most part since 2009. The BSP will keep monitoring the pulse of the economy and may consider a further round of cuts should the spectre of recession loom large. If the BSP does move it will have a degree of latitude, with inflation easing off from highs of 5.3% earlier in 2011 to 4.7% in November, inside the government’s targeted bracket of 3-5%.

One area of concern for the Philippines’s financial sector is the exposure local lenders have to European bank debt. According to a report issued on December 20 by the World Bank, the exposure of Philippine banks to those in Europe represents close to 70% of the country’s total claims in foreign banks. In total, the World Bank put the exposure level to European banks at around $15bn, with the risks of any escalation of the European debt crisis threatening to have some impact on Philippine financial stability.

BSP officials have downplayed the risks, saying the exposure of Philippine banks to European lenders amounted to only 1.4% of total assets as of the middle of 2011, less than the 2.9% at the beginning of the year.

What is clear from most of the indicators is that the Philippines will have to continue exercising a healthy degree of caution and sound economic management in 2012 if it is to avoid any recessionary contagion, though it should be able to maintain growth throughout the year thanks to the strength of domestic demand.