Philippine First Quarter Growth Disappoints

UNCLAS SECTION 01 OF 02 MANILA 001192

SENSITIVE

SIPDIS

STATE FOR EAP/MTS, EAP/EP/ EEB/IFD/OMA
STATE PASS EXIM, OPIC, AND USTR
STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: EFIN ECON ECIN RP CN XE XD
SUBJECT: Philippine First Quarter Growth Disappoints

REFS: A) Manila 0680, B) Manila 0796

SENSITIVE BUT UNCLASSIFIED


1. (U) Summary: Philippine Gross Domestic Product fell 2.3% from
the fourth quarter of 2008, the weakest performance in two decades.
Capital formation dropped; personal consumption sputtered; and the
government's much trumpeted fiscal stimulus did little to support
economic growth. In response, the Central Bank again cut interest
rates and the government vowed to accelerate spending. Some
analysts now warn of the possibility of a mild recession, although
many still predict the economy will muster some growth this year and
a financial crisis remains unlikely. The sobering performance has
re-energized calls for reforms to address constraints to growth.
End Summary.

First Quarter GDP Barely Up Year-on-Year
--------------


2. (U) Government data released on May 28 showed Philippine GDP up
by barely 0.4% year-on-year. The sharpness of the growth slowdown
surprised both government and private sector analysts. With
economic expansion outpaced by population growth of around 2%, real
per capita GDP declined by 1.5%, the first such decline since the
third quarter of 2001. Seasonally adjusted GDP (which is estimated
but lacks detail and is not published) declined 2.3% from the fourth
quarter of 2008, the weakest performance in 20 years.

Consumers Tighten Belts, Investors Cautious
--------------


3. (U) On the demand side, private consumption expenditures grew
only 0.8% year-on-year in real terms. Higher remittances by
overseas workers pushed up first-quarter Gross National Product to
4.4% growth but appeared to have done little to buoy personal
consumption. Capital formation slumped 16.5% from the first quarter
of 2008 as investments in durable equipment dropped nearly 18% (the
sharpest decline posted since the fourth quarter of 1998) and
businesses pulled back from building up inventories. Total exports
of goods and non-factor services contracted by 18.2% year-on-year in
real peso terms, reflecting weak merchandise exports (down 30.5%)
and tourism receipts (down 14.4%).


4. (U) On the production side, weak domestic and external demand
resulted in a 2.1% year-on-year contraction in industrial sector
output. This stemmed mainly from 7.3% and 1.1% declines,
respectively, in manufacturing and public utilities. Services
expanded by a lethargic 1.4% despite a relatively resilient business
services subsector led by the business process outsourcing industry.
Agriculture grew 2.1%.

Further Monetary Easing
--------------


5. (U) The Philippine Central Bank cut its borrowing (reverse
repurchase) and lending (repurchase) rates by another 25 basis
points on May 28. This represented the fifth rate cut since
December 2008, totaling 1.75 percentage points thus far.

Stimulus and Fiscal Tightrope
--------------


6. (U) According to first quarter GDP data, government consumption
grew 3.8% year-on-year but infrastructure investments contracted
4.4%. Total government consumption and infrastructure investments
grew a modest 1.6% from the first quarter of 2008. According to
Department of Budget and Management officials, cash disbursements
for infrastructure/capital outlays expanded by more than 60% from
the first quarter of 2008 but lags between cash releases and actual
construction meant that the expected impact of fiscal stimulation
would be more evident in succeeding quarters. The economy's
weaker-than-expected performance has intensified pressures on the
economic team to expand the 2009 fiscal deficit ceiling (currently
2.5% of GDP) as revenues faltered to prevent budget cuts that would
jeopardize fiscal pump-priming goals (Ref A).

Prospects and Challenges
--------------


7. (SBU) During a meeting on May 28, an International Monetary
Fund (IMF) economist told us that the IMF had expected that
first-quarter growth would be 2.2%, and growth for the entire year
0%. He noted that the IMF prediction of zero growth for the year

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had seemed pessimistic when it was first issued more than a month
ago, but now seemed realistic and, perhaps, even optimistic. He
added that some economists believed that Q1 would be the best
quarter of 2009 based on the momentum the economy had at the end of
2008, but Q4 2008 growth has now been revised down to only 2.9%, and
all 2008 down to 3.8%, showing that the economy was already slowing
significantly at the end of last year.


8. (SBU) The IMF official added that most economists thought it
would be appropriate for the Philippines to increase its government
deficit to 3% of GDP to allow more spending. However, he cautioned
that "ammunition" should also be saved for next year, so it would be
better for the Philippines to have a 3% budget deficit this year and
3% next year rather than a 5% budget deficit this year and 1% next
year. Economists have noted that there is little foreign interest
in purchasing Philippine government debt, and that any further spike
in risk aversion would divert more funds away from the Philippines
and make it still harder to issue debt.


9. (SBU) A number of local economists have told us that
unemployment of overseas workers will likely continue to go up in
coming months, threatening remittances and potentially dampening
economic growth further. Although expectations vary about overseas
employment and remittance prospects, economists agree that what
happens to overseas workers incomes will be a key factor in
Philippine economic performance this year.

Complacency to Urgency
--------------


10. (U) The government publicly continues to express confidence
that the Philippines will avoid a recession (defined in the
Philippines as two consecutive quarters of negative year-on-year
growth). The government and private sector both express optimism
for increased growth in the second semester. Although a few now
raise the possibility of a mild recession because of the
disappointing first quarter growth performance, many local and
foreign observers of the Philippine economy (including investment
banks and rating agencies) still predict that 2009 domestic economic
growth will avoid falling into negative territory.


11. (U) Still, there is broad concern about the global economic
environment and the first quarter growth numbers provided a sobering
warning. The Joint Foreign Chambers of Commerce, in a press
conference on June 1, renewed calls for the government to further
open up the economy and address long-standing competitiveness issues
that have stymied growth, investments, employment generation, and
poverty alleviation -- a message echoed by major local chambers and
donor agencies.

Kenney