At the start of 2007, the Philippine government projected a modest 5.6% increase in its gross domestic product (GDP). It channelled more money to support its "social payback" plan, the government's formula to improve socio-economic conditions through heavy spending on infrastructure, public health services and education. Meanwhile, on the demand side, private consumption was boosted by election-related spending as well as increased household purchasing power, fuelled by remittances from workers abroad. As a result, the economy grew by 7.1% in the first quarter, 7.5% in the second and 6.5% in the third quarter of the year.
All of the major areas of the economy experienced substantial growth in 2007. The service sector increased by 8.4%, which may be attributed to the flourishing business process outsourcing (BPO) industry. Mining and quarrying, as well as construction, have pushed the industrial sector to grow by 8%, while agriculture trailed not far behind with a 5.7% growth rate.
Despite its strong end, the year did not begin well for agriculture. Four super typhoons ravaged crop farms in northern Luzon and a prolonged dry spell further exacerbated farm production shortfalls. Animal and plant diseases incurred additional woes for the struggling sector.
The government's prompt response to mitigate the effects of erratic weather patterns helped deflect food shortages and prevented skyrocketing food prices. Billions of pesos were poured into irrigation rehabilitation, farm-to-market roads, post-harvest facilities, cloud-seeding operations to control precipitation and microfinancing for small farmers and fishers. Alternative sites were also established for farming during abrupt weather changes.
The country's healthy fiscal performance has set a mood for optimism in the Philippine economy. The government's projection of $2.1bn in foreign investment inflow for 2007 was already within reach as of September, when it totalled $1.9bn.
Foreign investors, driven by the favourable economic outlook, opted to reinvest their earnings in local corporations last year, despite several political events that rocked the nation. One of these was the attempted coup led by Senator Antonio Trillanes IV. The group seized one of the top hotels in Makati City, the country's financial district, and urged the public to join them in calling for the resignation of President Macapagal-Arroyo. Although the six-hour standoff failed to earn civilian support, the threat of political instability briefly dampened business confidence.
Nonetheless, investors' outlook remained bullish overall and was shared by market players, who were impressed when the Philippine Stock Exchange Index quickly bounced back a month after it was hit by the US sub-prime crisis. Prior to the meltdown, the index was hitting record highs, ending June at 3660.86 points, 68% higher than the first half of 2006.
The combined contribution of remittances from overseas Filipino workers (OFWs) and investments in the BPO industry have significantly shaped the country's good economic health. In the third quarter of 2007, the BPO sector expanded to 14.4%, while OFWs had already remitted $11.9bn in October, 15.2% higher than a year ago. Massive office space and housing demands spurring from these two economic movers have led to 16.7% robust growth for the construction sector in the third quarter. Commercial spaces became more expensive in major business districts and rents climbed 26% from 2006. Meanwhile, the housing sub-sector was the recipient of one-third of the remittances from Filipinos abroad, as more OFWs buy lots and lands for retirement purposes, investment, or to shelter their families.
Unfortunately, they are often the ones hit hardest by the strengthening of the Philippine peso, which started to rapidly appreciate in 2007 before closing at P41.28 against the greenback at the end of the year. Exporters, particularly small, labour-intensive firms, have also been shaken, if not destabilised, by the peso's strength. Some 100,000 farmers from the seaweeds industry have lost their jobs, while several garment factories have closed shop after losing their edge in the global market. They have appealed to the government to adopt a fixed rate of P50, though so far have not met with success.
On the domestic front labour relations seemed improved. Only six strikes took place in 2007, equivalent to 12,112 man-days lost, down 72% from 2006. The labour department said 2007 was "one of the most industrially favourable, harmonious and peaceful years in the country's entire history".
The Philippines had an impressive run in 2007, but will need to sustain the 7% growth level in order to make substantial progress in reducing poverty. Continued commitment to improving public infrastructure and combating corruption will help ensure it stays competitive with other emerging countries. However, maintaining the progress seen in 2007 may come as a challenge given the looming economic recession in the US, the Philippines' largest trading partner. Philippine exporters have already been hurt by the continued peso appreciation, and the rising price of oil and a weak US economy could further aggravate this situation. The government will need to set in place measures to cushion the effects of these combined threats and preserve the fruits of its political and economic reforms.