The Philippines will host the 12th ASEAN Summit and the 2nd East Asia Summit (EAS), where ASEAN leaders will meet with their counterparts from other negotiating countries, i.e., Japan, China, South Korea, India, Australia and New Zealand on January 13-15, 2007 in Cebu. The summit has been rescheduled from that previously set for December 10-14, 2006, due to typhoons and threats of terrorism. If the summit can proceed peacefully with no acts of terrorism, confidence in their security measures will be reinforced. Significantly, the ASEAN Summit will mark the 40th anniversary of the ASEAN's inception since 1967. The integration of ASEAN countries economically, politically and culturally has been pursued continuously to achieve regional solidarity and leveraging power in the world arena.
Even though the country has been plagued with terrorism threats that have undermined the investment climate there, their economy has exhibited an average growth of 5-6 percent over the past three years (2003-2005). Philippine economic growth is expected to continue the current momentum in 2006 and 2007, due to:
1. Foreign remittances from the Filipino laborers working abroad - a key driving force for the country's economy. In 2006, foreign remittances into the Philippines increased to some USD12 billion, up from the USD10.7 billion in the year before. As a result, private consumption recorded growth of 5.4 percent, which was the key contributor to the Philippines' GDP growth of 5.6 percent during the first half of 2006.
2. Upbeat Philippine exports account for around one-third of the country's GDP. During the first ten months of 2006 (January-October), their exports grew 16.4 percent to total USD39 billion. The country's exports are expected to expand into this year, albeit at a decelerating pace due to the economic slowdown in the US and China, the Philippines' key export markets, as well as the country's lower competitiveness as a result of the rising Philippine Peso versus the US Dollar. By comparison, however, the fact that other Asian currencies have also appreciated against the greenback will help limit any competitive disadvantage in the Philippine currency. On a positive front, the economic recovery in Japan – the Philippines' second-largest market – is expected to result in higher demand for the Filipino products. Additionally, bright prospects seem to lie ahead for the country's exports of electronics products, their top ranked export item that accounts for two-thirds of their overall exports. This growth can be attributed to rising demand for electronic products globally despite the US economic slowdown.
3. Rising FDI – In the first 10 months of 2006, FDI valued USD1.96 billion, rising 73.4 percent over the USD1.13 billion in the same period of 2005. Foreign investors who have invested highly there include the Netherlands, US, Japan and the UK. Important investment projects by foreign nationals include chemical products, electronic goods and steel, as well as services, e.g., BPO (business process outsourcing), medical research,engineering and construction.
4. Their Service sector is a key driving force for Filipino economy accounting for half of their GDP. Key service businesses of the Philippines is BPO (business process outsourcing) of which activities that tend to grow incessantly are call centers and ICT.
5. Soaring Balance of Payments and Foreign Reserves – Growth in exports and higher foreign remittances from Filipino workers overseas, as well as rising FDI in 2006, have resulted in the Philippines Balance of Payments posting a surplus of USD2,619 million in the first 9 months of 2006, accounting for 3.2 percent of their GDP. At the end of the same year, their FDI had also increased to USD23 billion.
6. Falling Budget Deficit of the State Sector – A hike of value added tax, corporate income tax and excise tax has boosted their state income. In addition, prioritized spending and the necessity for new infrastructure projects of the state sector has been helpful in reducing their state budget deficit to PHP50.4 billion in the first 9 months of 2006, healthier than the budget deficit of PHP108.5 billion in the same period of 2005.
7. Dropping Inflation – Their average inflation rate was 6.2 percent in 2006, which was the lowest level in 2 years. This has resulted in the Philippine government undertaking a more flexible fiscal policy. They will probably consider an interest rate reduction around the end of January of this year to stimulate their economy in 2007.
KResearch is of the view that although the economy of Philippines has shown indications of continued growth in 2006-2007 due to the above factors, there are some factors, both domestic and external, impacting their economic growth, living conditions and the quality of life for the Filipinopeople. Negative external factors include the economic deceleration of key counter-trade countries, e.g., the US and China, which are projected will thus be buying less from the Philippines, plus high global oil prices and various NTB (Non-Tariff Barriers) of other countries. Domestic negative factors expected to influence the economy of the Philippines are unemployment, poverty, unstable politics and terrorism, including the obstacle of delays in the operating process of state sector initiatives, which will deteriorate the investment climate and their economic stability.
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