Philippine Forecast: Year of the Castrated Bull

Romeo Bernardo & Margarita Gonzales

Executive Summary

The Year of the Ox in the Chinese astrological calendar signifies prosperity through hard work and fortitude. That may not be exactly the case this year.
With world economic conditions deteriorating at a rapid pace, we see a gloomier picture for the Philippines compared to when we last made our forecasts. But even with consumption slowing and private investment dwindling and unemployment rising here and abroad, we still expect the
economy to register some growth.
Both fiscal and monetary policy will be eased in response to economic weakness. However, we see a worsening of fiscal numbers not primarily because of the touted fiscal stimulus, which we believe will be limited, but to an erosion of revenues due to cyclical factors and disappearance of one-offs coupled by implementation of tax measures with negative revenue impact.
Despite difficulties, we still see plus signs in the country's payments position. The sharp drop in world import commodity prices, especially oil, allows a current account surplus even in bad scenarios this year for remittances and exports. Additionally, stress is minimized by the demonstrated ability of the country to access capital markets and service maturing debt (as evidenced by a recent successful dollar bond issuance) and diminishing political risk.
A sharper, more protracted global downturn remains a significant downside risk, especially its impact on remittances, an important driver of the economy that now seems to be temporarily grinding to a halt.(See attached file: 2009 02 04 1Q The_year_of_the_castrated_bull1 _2_.pdf)