High energy prices in the year up to July and the weakening of many of the Philippines' main export markets affected the local economy, but this was countered to some degree by falling inflation late in the year and the underlying soundness of the country's banking sector assets.
The past year was however the most challenging one for the economy since the Asian financial crisis in 1997, with Finance Secretary Margarito Teves telling local media in December that the government had been forced to revise some of its major fiscal targets set early in 2008.
Given the international financial crisis, Teves said the national budget would be in deficit in 2008 and that it would not be balanced until 2010, given the demands put on the state. According to figures from the Department of Finance, the budgetary deficit stood at $1.4bn as of the end of November, compared to a surplus of $268m in the first 11 months of 2007.
The government has also been forced to reassess its Gross Domestic Product (GDP) growth projections. Having targeted expansion of between 5.5 and 6.4% in early 2008, still below the 7.2% growth rate recorded in 2007, officials now admit that the economy will grow by a more modest 4.1 to 4.8%.
In late July, the government announced it would increase spending in the 2009 budget, lifting total expenditure to $32bn, up 14% on projected outlays for 2008. Silvestre Bello, the cabinet secretary, said on July 31 that the agriculture sector, public works, social welfare, and education departments would all receive higher budget allocations.
By the end of the year though, the government confirmed it was looking to further boost spending, stimulate growth and offset the effects of the global downturn, but said that much of the funding would be directed to infrastructure projects to bolster economic development. The exact details of these projects have yet to be released.
The government's privatisation programme was also advanced with the sale of stakes in two major companies, generating earnings of some $73m. In January, the state sold its holdings in the utility Manila Electric Company (Meralco) to the Government Service Insurance System for $18.5m. The stake was later sold on to the San Miguel Corporation. Besides, in late December, the London-listed fund manager Ashmore Group concluded payment of $54m for the government's 40% shares in the Philippines largest oil refiner, the Petron Corporation.
One sector that did meet expectations was the automotive industry. As the year closed, the Chamber of Automotive Manufacturers of the Philippines (CAMPI), stood by its projection of total vehicle sales of 125,000, giving the industry its strongest 12-month performance since 1997, with sales of 114,564 up to the end of November, an 8.3% improvement on the same 11 months in 2007.
According to CAMPI President Elizabeth H. Lee, low car ownership levels in the Philippines, combined with increasing numbers of Filipino workers returning home from overseas and looking to re-enter the local workforce, could further assist car and commercial vehicle sales in the new year.
"Most may choose to become entrepreneurs against the backdrop of declining job opportunities as a result of the crisis," she said of returning workers during a press conference in mid-November. "Bad times could somehow create some good opportunities for entrepreneurs," she added.
The Philippines' banking sector was spared the worst of the economic storm engulfing the globe, thanks in part to its low exposure to toxic assets. According to the Bangko Sentral ng Pilipinas (BSP), the central bank, the total exposure by local lenders to assets affected by the US financial crisis was around $1.27bn, a figure BSP Deputy Governor Ernesto Espenilla said in September was within the capacity of the industry to handle.
By the end of the year, little had changed, with BSP Governor Amando M. Tetangco Jr saying that just 1% of local bank's assets could be classified as being at risk.
"The Philippine banking system is in a comfortably manageable state from a capital and liquidity standpoint, and our past investments in banking and other financial reforms have helped shield us from catastrophic fallouts that the other jurisdictions have seen," Tetangco told local media on December 27.
Like many of the world's bourses, the Philippine Stock Exchange Composite Index (PSEi) had a rollercoaster of a year, opening with a total market value of $16.9bn but later shedding $8.3bn, a decline of 49%, by the last day of trading for 2008. The PSEi's worst day was October 27, when it dropped 12.27%, its worst fall since 1997, prompting a brief suspension of trading.
The slowdown in the global economy had some positive effects for the Philippines, with inflation starting to edge down towards the end of the year. July saw the Philippine's inflation rate hit a 17-year high, when price rises reached 12.2%, well above the 2.8% of 2007 and out of the 9 to 11% bracket predicted by the central bank. By the end of the year though, inflation had fallen back to 9.3%, thanks in part to lower oil prices and a cooling of demand.
The drop in inflation, combined with the need to inject additional credit into the marketplace, prompted the BSP to cut interest rates by 50 basis points in mid-December, taking its key lending rate to 7.5%, following a series of rate increases throughout the year.
Though many analysts and the government itself are predicting another year of challenges for the Philippines economy in 2009, none are foreseeing recession, but looking instead forward to a year of consolidation, with growth expected to accelerate in 2010.