The Economic Climate of the Phillipines

Important sectors of the Philippine economy include agriculture and industry, particularly food processing, textiles and garments, and electronics and automobile parts. Most industries are concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the Philippines, which possesses significant reserves of chromite, nickel, and copper. Recent natural gas finds off the islands of Palawan add to the country’s substantial geothermal, hydro, and coal energy reserves. In conclusion, the Philippines is abundant in mineral resources and natural gas.

The agricultural sector sees the involvement of about two-thirds or more than 40% of Filipinos. Rice remains the most important agricultural product. In order to increase the economic growth of the country, the Filipinos rely on major products such as coconuts (copra and coconut oil), abaca (Manila hemp), tobacco, and sugar for export purposes. The island republic is, however, diversifying from agricultural and mineral product exports into higher value manufactured and luxury goods such as electronics, apparel and clothing accessories as well as computer-related products. Despite the growing economy, the government was able to keep the domestic inflation under control at an approximate 4.8% in 1998. The agricultural industry of the Philippines is one of the fastest growing economies in South East Asia. The market consists mostly of services, as productivity in agriculture and industry is growing as well.

The Philippines was less severely affected by the Asian financial crisis of 1998 than its neighbors, aided in part by annual remittances of $7-8 billion from overseas workers and no sustained run-up in asset prices or foreign borrowing prior to the crisis. From a 0.6% decline in 1998, GDP expanded by 2.4% in 1999, and 4.4% in 2000, but slowed to 3.2% in 2001 in the context of a global economic slowdown, an export slump, and political and security concerns. GDP growth accelerated to 4.3% in 2002, 4.7% in 2003, and about 6% in 2004, reflecting the continued resilience of the service sector, and improved exports and agricultural output. Nonetheless, it will take a higher, sustained growth path to make appreciable progress in poverty alleviation given the Philippines’ high annual population growth rate and unequal distribution of income

The infrastructure of the Philippines is inadequate for the economic development sought by the government, international agencies, and multinational corporations. Some large-scale improvements were made in the past to the country’s schools, health centers, bridges, roads, and irrigation works. However, government investment in infrastructure has not kept pace with population growth and modern technologies. Roads remain unpaved in most rural areas. Cities lack sufficient public transportation, garbage collection, energy resources, potable water, and sewerage treatment. Resources for infrastructure-development projects are often limited because of the country’s huge payments on its foreign debt.

In 2004 the economy grew by 6.1%, higher than government estimates. However the year also saw an inflation rate of 6%, mostly as a result of higher oil prices. The first 3 months of 2005 have seen record inflation averaging 8.5%, and with declining imports and exports it is expected that the economy might contract in the first quarter. On the currency side, the peso, along with other Asian currencies, has gained on the dollar this year, as of early May 2005 is trading at around 54.20 to the greenback. The peso has been tagged as the best currency performer for the year 2005, according to Forbes.

Despite slower than hoped growth, the Philippines’ longer term prospects remain bright. The Aquino and Ramos administrations opened up the relatively closed Philippine economy and provided a firmer base for sustainable economic growth. After a slow start, President Estrada and continued with, and expanded, liberalization and market-based policies and reforms. Efforts to reform the constitution to encourage foreign investment, particularly foreign ownership of land, were abandoned amidst nationalist opposition. Initial optimism about prospects for economic reform also had dimmed amid concerns of governmental corruption. Recent scandals involving the Philippine Stock Exchange, and the President’s close ties to certain businessmen, shook confidence of investors and the business community and ultimately led to successful efforts to impeach and remove the president. The pace of economic reform, particularly the passage of key legislation in areas beyond retail trade, electronic commerce, banking reform, and securities regulation, is expected to accelerate under Macapagal-Arroyo and should improve the investment and business climate

The Philippines has extensive deposits of valuable metallic and mineral ores, including copper, gold, silver, chromium, lead, and nickel. Copper is the country’s leading mineral product. In 2002 the Philippines produced 18,364 metric tons of copper. The mining industry grew rapidly in the 1970s in response to government initiatives. In the mid-1980s, however, output in the metallic sector entered an overall decline as world prices for metals weakened. The nonmetallic sector, meanwhile, was stimulated by a rising domestic demand for coal. The country’s plentiful coal deposits were explored as an alternative to costly petroleum imports, and the mining of coal increased substantially after 1979. In 2001 the Philippines produced 1.35 million metric tons of coal.

In 2002 agriculture, forestry, and fishing contributed 15 percent of the GDP. About 19 percent of the total land area of the Philippines is arable, or suitable for cultivation. The most important subsistence crops are rice, corn, cassava, and sweet potatoes. Rice paddies and cornfields occupy about half of the arable land of the Philippines. Coconuts are one of the most important cash crops, and the Philippines is one of the world’s leading exporters of coconut products, including coconut oil and copra (dried coconut). Bananas and pineapples are also important commercial crops, both of which are grown on large plantations owned by multinational companies. Other crops include sugarcane, abaca (Manila hemp), coffee, tobacco, and mangoes. Livestock on farms include caribou (water buffalo), cattle, chickens, goats, horses, and hogs. Many farmers are tenants, who rent the land and pay the landowner a share of the crop. Other farm workers include seasonal migrant laborers.

Sugar was the most important agricultural export of the Philippines from the mid-1800s to the mid-1970s. Much of the modernization of the country took place to facilitate the processing and transport of this export crop. For many years, the Philippines had access to a protected and subsidized U.S. market for its sugar. The decline of the sugar industry involved many factors, including the expiration of a U.S. quota system on sugar imports in 1974 followed by a sharp decline in world sugar prices.

Hardwood trees such as mahogany were once one of the country’s most valuable resources, but now this resource is severely depleted. The government banned the export of unprocessed hardwood logs in 1986 in an effort to stimulate domestic processing of raw lumber into finished products. Initially this policy was successful, and products such as wood veneer became important exports. However, illegal logging and unsuccessful reforestation programs depleted the hardwood forests, and output from lumber-processing industries declined. Other forestry industries remain viable because their products are based on more easily renewable sources than hardwood, such as bamboo, rattan, and the ceiba (kapok) tree. Bamboo and rattan are used in making furniture, baskets, floor mats, and other household goods. The ceiba tree, also known as the silk-cotton tree, is cultivated and harvested for its fiber, which is used in the manufacture of finished goods such as insulation and upholstery.

The Philippines could face higher oil prices, higher interest rates on its dollar borrowings, and higher inflation. Fiscal constraints limit Manila’s ability to finance infrastructure and social spending. The Philippines’ consistently large budget deficit has produced a high debt level and has forced Manila to spend a large portion of the national government budget on debt service. Large, unprofitable public enterprises, especially in the energy sector, contribute to the government’s debt because of slow progress on privatization. Credit rating agencies are increasingly concerned about the Philippines’ ability to sustain the debt; legislative progress on new revenue measures will weigh heavily on credit rating decisions.

A major challenge to the economy is that the Philippines unemployment rate, one of the highest among Association of Southeast Asian Nation (ASEAN) countries, averaged 11.8% in 2004. Government plans to generate around 1.5 million jobs a year in the next six years, if achieved, still may not make much of a dent in unemployment. ADO points out that the economy needs to create about 1 million jobs a year just to absorb new entrants into the workforce.

In 2002 the labor force of the Philippines numbered 34.2 million people. Agriculture, forestry, and fishing employed 37 percent of the labor force; manufacturing, construction, and mining, 16 percent; and services, 47 percent. The unemployment rate was 9.8 percent in 2001.

Employment opportunities associated with the modern economy, mostly services and manufacturing, are concentrated in a few urban centers, especially the Manila metropolitan area. The country’s high rate of population growth results in large additions to the labor force each year in an economy with a high rate of unemployment and even higher underemployment. The shortage of employment opportunities has resulted in large-scale migrations of Filipino workers, both sophisticated professionals and unskilled workers, to countries such as the United States and Malaysia. Approximately 6 million Filipinos work abroad. Many of them send a portion of their earnings to relatives in the Philippines, infusing the economy with a significant source of foreign exchange

Merchandise export growth is projected to decline to 7.0-8.0%, as the global economy slows and international competition intensifies. Growth in merchandise imports is expected to decelerate from 10.6% last year to around 5.5-6.5% during the forecast period.

Industrial growth will taper to around 4.0% during the period, down from 5.3% in 2004, due to uncertainties in global markets. The fiscal deficit is expected to narrow to 3.6% of GDP in 2005, 3.2% in 2006, and 2.8% in 2007, from 3.8% in 2004, once more tax measures are approved. Underpinning the fiscal program are measures to boost the revenue-to-GDP ratio to 18% in 2010, mainly from higher revenue collection efficiency.

The fiscal deficit is expected to narrow to 3.6% of GDP in 2005, 3.2% in 2006, and 2.8% in 2007, from 3.8% in 2004, once more tax measures are approved. Underpinning the fiscal program are measures to boost the revenue-to-GDP ratio to 18% in 2010, mainly from higher revenue collection efficiency.

the country’s high debt interest payments, which escalated from 19.5% of total public expenditures in 1998 to 29.5% in 2004, are crowding out the productive portion of the national budget. Left unchecked, the Government will experience lower expenditures, further credit-rating deterioration, and declining public services. An increasing debt stock could also trigger a significant depreciation of the peso.

In the past two to three decades the economy of the Philippines has been lagging in comparison to its neighboring countries in the East. However because of the development project and efforts to make the Philippines more competitive in the global arena, its International Trade, Aid and Banking system has gone through dramatic changes in hope that it will help the economy of the country sustain a yearly economic growth. Historically the Philippine has always been one of the countries in the East Asia that’s been paid attention too due to its potential in economic growth and natural resources. The unstable governance of the country however has imposed a great halt in the economic growth of the Philippines. Reforms and changes in the structures of the economy through foreign trade, aid and banking however has helped the economy to smooth out the imbalances in the country.

The Philippines receives an ample amount of foreign aid from the International Monetary Funds (IMF), World Bank, USAID, and other bilateral organizations. The Philippine Banking System has been continually promoted and improved through financial reforms, policies and structures. The numerous changes in the financial sector of the Philippines as well as the aid and trade in the international arena all is a result of the efforts to make the economy of the Philippines more competitive like its neighboring countries.

Philippine development over the past two decades is characterized by uneven economic growth and slow demographic transition. Respectable economic growth was experienced in the 1960s and early 1970s. This was followed by low and negative growth rates in the late 1970s up to the early 1980s. A tentative resurgence followed in the late 1980s and much better growth performance around the mid 1990s. On the demographic front, after a rapid decline in fertility rates in the 1970s, the gains have been very slow thereafter. While the neighboring countries of Indonesia and Thailand have successfully reduced their population growth rates to 1.5 and 0.9 percent, respectively, the Philippines still growing at 2.3%.

China’s services sector, increased 7.8 percent in 2000, It should continue to grow as restrictions on banking, insurance, telecommunications, and professional services such as accountancy are removed. China specializes in labor-intensive, low-end products. But it is slowly producing more sophisticated products such as electronics and other light manufactured goods. In 1996, China produced only 4 percent of the world’s desktop computers, but by 2000 that number had increased to 21 percent.

Japan is among the world’s largest and technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, and processed foods

Agriculture provides a subsistence livelihood for 85% of the population of New Guinea

Indonesia became a net oil importer in 2004 due to declining production and lack of new exploration investment. Main Exports include petroleum and natural gas, textiles, apparel, footwear, mining, cement, chemical fertilizers, plywood, rubber,

Thailand has a well developed infrastructure, a free-enterprise economy, and welcomes foreign investment. Key exports are textiles and garments, agricultural processing, beverages, tobacco, cement, light manufacturing such as jewelry, electric appliances and components, computers and parts, integrated circuits, furniture, plastics, world’s second-largest tungsten producer, and third-largest tin producer

Malaysia’s main industries are rubber and oil palm processing and manufacturing, light manufacturing industry, electronics, tin mining and smelting, logging and processing timber; Sabah – logging, petroleum production; Sarawak – agriculture processing, petroleum production and refining, logging

Main Industries in Vietnam are food processing, garments, shoes, machine-building, mining, cement, chemical fertilizer, glass, tires, oil, coal, steel, paper

While trade liberalization presents significant opportunities, intensifying global competition and the emergence of low-wage export economies also pose challenges. Competition from other Southeast Asian countries and from China for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, lower costs of doing business, and promote good public and private sector governance.

The Makati Business Club and the Nippon Keidanren (Japan Business Federation) Mission to Southeast Asia conducted a dialogue to reinforce economic and strategic partnership between the Philippines and Japan through effective collaboration of private sector initiatives. The dialogue was held last 2 November 2004 at the Makati Shangri-La Hotel. The agenda of the meeting revolved mainly on issues concerning the ongoing negotiations for the Japan-Philippines Economic Partnership Agreement, which recently concluded its fifth round of talks.
Both sides affirmed the importance of strengthening their economic partnership. Jaime Augusto Zobel de Ayala, head of the Philippine delegation, emphasized Japan’s substantial contribution to the economy, being the Philippines’ biggest trade partner and one of its top direct foreign investors.

The Philippine panel inquired about the prospect of opening the health sector of Japan to professional foreign health workers, especially Filipinos. Japan’s aging population and rising medical costs create a lucrative market for Filipino health professionals like caregivers and nurses, of which the Philippines is a major source. Japan, in return, will enjoy the service of professional health care at relatively low cost.

Malaysia and Indonesia were working hard diplomatically to resolve a border dispute in the Sulawesi Sea in which both sides sent warships to the contested area to stake their claims. Both nations are economically dependent on each other – Malaysia on Indonesia largely for migrant labor, Indonesia on Malaysia for capital investment – and waging war over two putatively oil-rich islands isn’t thought to be in the long-term interest of either country.

Despite growing competition from neighboring countries, the 151-year old coconut industry remains a strong pillar of the Philippine economy, providing jobs and livelihood to millions of Filipinos and generating millions of dollars in export revenues.
The massive cultivation of coconuts in the Philippines started in 1854 during the Spanish era. Today, we have 331 million coconut trees, more than half of which are located in Mindanao. A third of the country’s arable land or 3.3 million hectares are planted to coconuts.
More than 25 million Filipinos, or about 30% of the total population derive livelihood, directly or indirectly from the coconut industry. The industry generates average annual export earnings of US$ 690.5 million, the highest in the agricultural sector and the fifth highest among all merchandise exports of the country

Control is a major factor of management. Our company needs to make sure that our products are being marketed the same way throughout the entire Nation. However often times even compete ownership does not guarantee complete control. Some reasons this may occur are if the local government were to intervene and require our company do things that we otherwise would not do.

Partnership Requirements may need to be enforced in order to ensure that are workers and industries are protected from what the Filipino Government may perceive to be exploitation or domination.

Production Costs could possibly pose a threat to the expansion into new markets several actors can strongly influence production cost. This could in turn eat away profits and force immediate withdrawal from the nation.

Rationalized Production is a system that makes sure that products are produced in a way that ensures the cost of producing is at it’s lowest. This is one method that could help to balance the effects or prevent rapidly increasing production costs.

The Cost of Research and Development could also pose a threat if we spend thousands or millions of dollars on R&D only to find that The Philippines is not a strong investment we may end up losing more money than we could have potentially gained. The cost of R$D has led many countries to form alliances so that it can afford these rapid changes. This could pose a problem because of dealing with one Nation (depending on the market we are trying to enter) we could be dealing with a group of Nations.

Customer Knowledge is also another very important issue We need to make sure that the market we are entering has a informed customer base as well as a vast one . It could also help to increase product awareness and reputation. If we manufacture products that the Philippines is unrivaled in we will be able to broaden are Customer base and create a line of “superior Products” that will be highly anticipated in are home markets.

We may also be able to generate greater investments if our current clients decide to follow us to the Philippines this could prove beneficial to our overall investment. Also by following any rival companies we will be able to tap into a market that has already been tested this way we will know what works and what doesn’t which will give us an advantage over our competitors.

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