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Professor: OSADA Hiroshi Name: NGOUN Sethykun

GSID, DID, M1 ID: 300701101

Macroeconomics Structure of the Philippines


Geography The republic of the Philippines is located in Southeast Asia and consists of 7,107 islands in the western Pacific Ocean. It borders the Philippines Sea on the east, the South China Sea on the west, and the Celebes Sea on the south. The islands are divided into three island groups: Luzon, Visayas, and Mindanao. And these groups are separated into sixteen regions: National Capital Region, Cordillera Administrative Region, Ilocos, Cagayan Valley, Central Luzon, Southern Tagalog (CALABARZON, MIMAROPA), Bicol, Western Visayas, Central Visayas, Eastern Visayas, Zamboanga Peninsula, Northern Mindanao, Davao Region, SOCCSKARGEN, Caraga, and Muslim Mindanao. Political system The Philippines has a presidential government system. The president is elected by popular vote to a six-year term, during which they appoint and preside over the cabinet. The bicameral Congress is composed of a Senate, serving as the upper house whose members are elected nationally to a six-year term, and a House of Representatives serving as the lower house whose members are elected to a three-year term and are elected from legislative districts and through sectoral representation. The judicial power is granted to the Supreme Court, composed of a Chief Justice as its presiding officer and fourteen associate justices, all appointed by the President from nominations submitted by the Judicial and Bar Council. Economics - National economy and growth The average growth rate of nominal GDP for nine years from 1996 to 2005 is 10.70%, higher than the average growth rate of real GDP for the same period, which is only 4.03%. The growth rate (Nominal GDP) from 1996 to 2005 seems to be fluctuating. The growth rate from 1997-1998 is only 9.82% probably due to the Asian financial crisis (1997&1998). Then, the growth rate from 1999 to 2000 is 12.69% similar to the growth rate of 12.57% from 2003 to 2004. The growth rate from 2000 to 2001, from 2001 to 2002, and from 2002 to 2003 are around eight and nine percent. Finally, the growth rate is high again, 11.53% from 2004 to 2005. Nominal GNP in the Philippines is higher than nominal GDP in amount from 1996 to 2005. The nominal income probably comes mainly from the remittance from the Filipinos working abroad. In terms of peoples welfare, the per capita GNP (at constant 1985 prices) in 2005 is 15,490 pesos compared to 12,298 pesos in 1996. The average growth rate of per capita GNP (constant prices) is 2.63%, which is a small average growth rate within nine year from 1996 to 2005.

Professor: OSADA Hiroshi Name: NGOUN Sethykun

GSID, DID, M1 ID: 300701101

- Expenditure structure The consumption in the Philippines is increasing in amount (pesos) in year 2005 compared to that in year 2004 and the previous years. The marginal propensity to consume gains its first peak of 0.92 in 1998 and then second one of 0.83 in 2001, but only 0.77 in 2005 compared to 0.66 in 2004. It means that the additional consumption between 2004 and 2005 may provide 0.77 point of additional GDP growth, while the additional consumption between 1997 and 1998 shares 0.92 point to the additional income growth in that period. Alternatively, the slope of consumption function in 2005 is 0.77, lower than 0.92 in 1998. The investment ratio seems to be high, around 20%, in the year of 1996, 1997, 1998, 1999, and 2000. Then, it falls consecutively from 17.93% in 2001, to 17.61% in 2002, to 16.84% in 2003, and to 14.91% in 2005. It denotes that the fixed capital invested is rather low in 2005, which slightly affects the GDP growth in 2005. The average increase of imports from 1996 to 2005 is 14% and the average increase of exports at same period is 19%. If we compare the export dependency ratio with the import dependency ratio, there are three stages of changes. For the first stage from 1996 to 1998, the Philippines GDP growth relies a bit more on import than export. The import and export dependency ratio in 1998 is 45.96% and 44.91% continuously. For the second stage from 1999 to 2000, the income growth depends more on export rather than import. Finally, for the third stage from 2001 to 2005, the economy depends more on import. Summarily, the Philippines government has been trying to balance the imports and the exports. In terms of additional share of imports in additional growth of GDP, the marginal propensity to import is only 0.22 in 2005 whereas 0.53 in 2004, 0.48 in 2003, and 1.02 in 2002. It indicates that the additional increase of imports from 2004 to 2005 may bring only additional increase of 0.22 point in GDP growth from 2004 to 2005. - Investment In the Philippines, for the period from 2000 to 2005, the domestic investment is higher than FDI. For example, in 2005, the amount of domestic investment is 762,819.30 million pesos while the amount of FDI is only 45,169.70 million pesos. The local investment might come mostly from the transfer money from the Filipinos working abroad. - Balance of Payment The trade balance of goods & services from 2000 to 2005 is negative (trade deficit), which means that the imports of goods & services are higher than the exports. The current account faces the deficit in 2000, 2001, and 2002 but gains surplus of 15,285.25 million pesos in 2003, 91,121.04 million pesos in 2004, and 129,670.09 million pesos in 2005. This is because of the high current transfer from Philippines working abroad. For instance, the net current transfer is 8,386 million dollars in 2003, 9,160 million dollars in 2004, and 11,403 million dollars in 2005. For capital account, it is positively fluctuated from 2000 to 2005. The balance falls from 6,098.77 million pesos in 2000 to 1,393.44 millions pesos in 2002, and rises to 2,926.96 million pesos in 2003. Then, it descends to 952.68 million pesos in 2004 but goes up to 2,203.40 million pesos in 2005. The overall BOP balance is negatively (22,494.75) million pesos in 2000, (10,300.59) million pesos in 2001, and (15,691.20) million pesos 2004. But it is positively 41,803.29 million pesos in 2002, 6,233.35 million pesos in 2003, and 132,589.60 million pesos in 2005. 2

Professor: OSADA Hiroshi Name: NGOUN Sethykun It denotes that the general BOP condition in 2005 is good.

GSID, DID, M1 ID: 300701101

- Price and money GDP deflator is increasing from 2.558 in 1996 to 4.480 in 2005. It points out that the price is increasing in the average of 3.514 from 1996 to 2005. The inflation rate is 6.44% in average for the same period of time, which shows that the government policy is to stabilize the inflation rate around 6%. The noticeable inflation rate is 10.46% from 1997 to 1998, the time when Asian crisis occurred compared to the inflation rate 6.24% in 2005. In terms of the money supply, the average growth rate of M1 and M2 from 1996 to 2005 is 12.37% and 10.07% respectively. The financial deepening (M2/GDP) hovers around the average of 41.49% from 1996 to 2005. It seems that the government tries control the money supply (M2) or gradually increases the money supply in order to keep the inflation rate to the minimum rate (around 6 %) and to regain high growth rate (11.53% in 2005). The average interest rate (bank average lending rate) from 1996 to 2005 is 12.32%, which stills high for the investors especially foreign investors. - Exchange rate The average of annual average exchange rate from 1996 to 2005 is around 44.77. The general trend of the exchange rate is increasing since 1996. The annual average exchange rate increases to the high points, first 40.893 pesos per US dollar in 1998 and then 56.040 in 2004 compared to 55.085 in 2005. This is because of the high increase in imports than increase in exports. Therefore, the change of annual average exchange rate matches with the government policy of floating exchange rate. - Labor Force Participation The economy in Philippines is going very well. Thus, the employment rate is remarkably high: 92.6% (of total labor force) in 2005 compared to 89.1% in 2004, and 89.8% in 2003 & 2002. The unemployment rate is only 7.4% of total labor force in 2005. Conclusion According to the analysis, the Philippines economy is going well because the average growing rate for 9 years is around 10%. The government has been trying to stabilize the economy by managing the money supply (M2), stabilizing the price, keeping inflation rate around 6%, maintaining the exchange rate around 44.77 pesos per US dollar, encouraging the local investment, and reducing the unemployment rate (policy for working abroad). However, the government should encourage more FDI and keep the balance of payment balanced. Reference: - National Statistical Coordination Board. 2006 Philippine Statistical Yearbook. 2006. Makati City, the Philippines - International Monetary Fund: International Financial Statistics Yearbook - Wikipedia; the Philippines. (Last accessed 23 July 2007) http://en.wikipedia.org/wiki/Philippines