GDP growth seen to fall below targets

The country’s gross domestic product (GDP) will slip below the target range this year as a result of the anticipated negative impact of the failed mutiny in Makati last weekend, according to the Ateneo Macroeconomic Forecasting Model (AMFM).

The AMFM was designed by the Ateneo Center for Economic Research and Development headed by former Socioeconomic Planning Secretary Cielito Habito.

"If investment drops by 10 percent as a result of the mutiny, the 2003 GDP growth could slow down to 3.1-3.6 percent," Habito said. The government is projecting GDP to grow by between four to 4.5 percent for the full year.

"The most likely effect of the failed mutiny would be to dampen investment and foreign tourist arrivals, and raise financing costs for our government (i.e. further lowering of our sovereign rating). The AMFM projects a 0.9 percent drop in GDP for every 10 percent decline in investment," the report said.

Habito said the severity of the failed mutiny’s economic impact hinges on the magnitude of the investment backlash. The challenge now is to restore confidence in the economy as quickly as possible and minimize the negative investment sentiment."

Earlier, the Asian Development Bank (ADB) said the Makati siege would have a serious impact on new foreign direct investments but predicts limited effects on existing investments.

ADB said while the markets exhibited an alarmist tendency towards the failed mutiny, the multilateral financial institution, however, did not revise its forecast GDP growth of between three to four percent this year.

Despite the relatively positive economic indicators in the first semester, the Ateneo research center warned that these indicators tend "to mask four underlying weaknesses of the economy that must be squarely addressed."

These are: (a) the narrow-based growth dominated by the services sector, and only by certain subsectors within services, i.e. communications, wholesale and retail trade; (b) weak job generation, with economic growth not being accompanied by a commensurate rise in employment; (c) deterioration in the balance of payments, threatening future currency weakness and; (d) the fragile fiscal situation notwithstanding the improving revenue collections.

The Ateneo unit said while investments improved in the first semester, investment spending is expected to remain sluggish the remainder of the year due to political uncertainties, and especially because of the failed military mutiny.

"Momentum in consumer spending growth may lose some steam due to the slight uptick in inflation arising from the peso’s continued depreciation against the dollar and the uncertainties from both political and economic fronts may dampen consumption further," it said.

Adding to the difficulties is the weakening of the economies of the country’s major export partners particularly Japan and the United States thus undermining the export outlook in the near term.

The peso has been depreciating as a result of weaker dollar export receipts and speculative pressures arising from negative sentiments on peace and security, the political outlook and the government fiscal situation.