STAR’s Top Ten business stories of 2004, Year In Review Options

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Yearender: The STAR’s Top Ten business stories of 2004
By Rica D. Delfinado
The Philippine Star 01/01/2005

The world economy flourished in 2004, with the expected recovery evident in most of the nations, particulary the US and emerging economies in Asia.

Most analysts said the world economy will have enjoyed one of the strongest years for more than a decade, with global growth likely to reach four percent for the whole of 2004. Pitfalls, however, remain as the declining dollar and high oil prices have sharpened fears of a global slowdown this year.

For the Philippines, in particular, 2004 was a remarkably challenging year.

Coming from a hotly contested national elections, the country had to do a great balancing act to cope with the ramification of rising global oil prices, a looming fiscal crisis, worsening budget deficit and threats of credit ratings downgrade from major international ratings agencies.

While the Asian Development Bank (ADB) has credited the country by showing "surprising economic resilience in 2004" and cited a series of positive developments which include the sale of the state-owned 600-megawatt Masinloc power plant to jumpstart the privatization of the power industry and the Supreme Court ruling upholding the Mining Act of 1995, most economists remained concerned over the possibility of a credit rating downgrade from international credit rating agencies due to concerns over the country’s fiscal position.

A downgrade would have raised borrowing costs for the government which relies on debt to plug a national budget deficit expected to reach P198 billion or 4.2 percent of gross domestic product (GDP) in 2004.

But despite the downward pressure created by the volatility in global oil prices, the local economy headed towards the end of 2004 with a good momentum, expanding at a better-than-expected growth of 6.5 percent in the first three quarters of the past year.

Supported by strong personal consumption and, to a lesser extent, exports, the ADB upgraded the outlook for the country’s GDP following the robust 6.5-percent growth in the January to September period. GDP measures the value of all goods and services within the country and is the broadest barometer of the country’s economic health.

For all of 2004, the economy was expected to grow by more than six percent, beating most forecasts, including the government’s original target of 4.9 percent to 5.8 percent.

However, with consumer spending slowing, partly due to high oil prices and weaker export growth in the last quarter, the ADB said the country’s GDP forecast for 2005 is expected at a slower 5.9 percent.

Following is The STAR’s choice of the 10 most prominent business stories of 2004.

• Soaring global oil prices

The continued increase in world oil prices in 2004 was enough to send the global community in jitters. The steady increases in global oil prices rattled the local business community, particulary the manufacturing sector which suffered heavily from unabated increases in production costs. Because of deregulation, the local industry is heavily affected by the fluctuations of prices in the global market. For the whole of 2004 alone, pump prices of gasoline went up by at least 13 times while that of diesel recorded a total of 14 price hikes. Crude prices shot up to $55 a barrel at the end of October but have since fallen back to between $40 and $44 in New York and London. But oil is still in the news as questions remain about how the rising demand from China and supply disruptions from major oil producing countries could be resolved.

• Supreme Court upholds constitutionality of Mining Act of 1995

In a landmark decision, the Supreme Court revised itself in early December by upholding a law opening up the country’s mining industry to foreign investment. The SC declared that the law liberalizing the country’s mining industry and its implementing rules and regulations were constitutional after all. Analysts said the decision will potentially open the door to billions of dollars in foreign investment in the country’s mining industry. The SC reversed its decision in January when it had struck down as unconstitutional the Mining Act of 1995. Reinstating the law means that 100-percent foreign ownership would now be allowed in the mining sector. The Philippines is considered a highly mineralized area with mineral resources estimated to cover nine million hectares or about 30 percent of the country’s total land area. The minerals industry offers huge untapped potentials. For 2003 alone, the mining sector employed 104,000 workers and provided P4 billion to P5 billion in wages and benefits.

• Sale of Masinloc power plant

The government successfully sold to an Australian-led group – the YNN Pacific consortium – the 600-megawatt Masinloc coal-fired power plant in Zambales for $561.7 million. The Masinloc plant was the sixth power facility successfully sold through the auction block since the government started privatizing the generation assets of Napocor in 2004. The YNN consortium is composed of YNN Holdings with Filipino investors and Great Pacific Financial Group of Australia. Built at a cost of $530 million in 1998, the Masinloc power plant consists of two generation units with a capacity of 300 MW each. It stands on a 147-hectare site in Bgy. Bani in the town of Masinloc, Zambales. The coal-fired plant was sold as a merchant plant which means without an attached supply contract.

• Phaseout of garment export quota

Trade unions across the globe said that the phasing out of the garment quota system is predicted to lead to the loss of millions of jobs in countries which are already some of the poorest in the world. It also said the phasing out of quotas could lead to unfair competition from China and has already led to "a situation that is creating near panic in dozens of countries across the globe."

The end of the quotas has come in stages, affecting 16 percent of the relevant products in 1995, 17 percent in 1998, 18 percent in 2002 and 49 percent in 2005.

The garment industry in the Philippines, thought, by some experts to be vulnerable after the quota phaseout, has been consolidating and downsizing for years in preparation for the changes. Government officials said the end to quotas would have an impact on the local economy but the industry has been prepared for some time.

Garments and textiles are the Philippines second biggest revenue earner, contributing about eight percent of the country’s total export earnings. The industry employs at least 400,000 people.

In the first 11 months of the year, garment exports managed to rise to $2.523 billion from $2.518 billion in the same period last year. In 2003, garment and textile exports were worth $2.8 billion and the Department of Trade and Industry’s estimate for 2004 is much the same.

Among the global brands being supplied by Filipino garment exporters are Gap, Liz Clairborne, Ann Taylor, Polo by Ralph Lauren, DKNY and Tommy Hilfiger.

• Agri sector, economy’s only bright spot.

The agriculture sector – which comprises a fifth of the country’s total economic output and employs more than half of the country’s workforce – emerged as the brightest spot in the country’s economy in 2004.

Despite unfavorable weather, particularly in the last quarter of 2004, the agriculture sector is projected to grow in the range of 5.11 percent to 5.85 percent, exceeding the original projected growth rate of 4.8 percent to five percent for 2004. The sector posted a robust gain of 7.98 percent in the first quarter, 4.22 percent in the second quarter and 7.94 percent in the third quarter to post a cumulative growth of 6.8 percent in the first nine months of 2004. Economists said agriculture sector’s strong performance in the third quarter has prompted the government to consider raising its economic growth for the whole of 2004.

• Malacañang’s admission of a looming fiscal crisis.

The President admitted in early August last year that the economy is in the midst of a "fiscal crisis." This was following reports from economists that the country might suffer an Argentina-type of debt crisis within the next three years unless drastic measures were implemented to boost revenues and public expenditures were cut. Government officials admitted that the confusion caused by the President’s statement had rattled foreign creditors and holders of government bonds abroad. However, the Development Budget and Coordination Committee, composed of President Arroyo’s Cabinet members with economic portfolio, has said that while the fiscal situation required "both painful and urgent measures," the government was nowhere near a fiscal crisis.

The group said that a fiscal crisis as defined by international financial institutions, such as credit rating and multilateral agencies, as being in a state of default and having a deficit that can no longer be financed due to limited access to the capital market.

Finance Secretary Juanita Amatong said that the Philippines was far from this definition. On the contrary, the country has never defaulted on its loans, it continues to pay its creditors on time, and it has raised enough international bonds this year to meet its financing requirements for 2004.

• Local stock market one of Asia’s best performing markets

Since the start of 2004, the 33-share Philippine Stock Exchange composite index has risen some 22 percent followed by Jakarta at 18 percent while Japan’s Nikkei 225 index has been struggling at around 1.5 percent.

In early October, the Philippine market has surged to highs not seen in more than five years, much of the rise being driven by inflows of foreign capital.

The year 2004 proved to a better year for the local bourse as gains in telecommunications stocks offset weakness created by debilitating issues on the political and economic fronts.

In the last trading day of 2004, the 30-company Philippine Stock Exchange (PSE) composite index surged by 26 percent to settle at 1,822.83 from 1,442.37 points in the last trading day of 2003. In 2003, the market expanded by a strong 42 points, which was a dramatic recovery from the 13-percent loss recorded in 2002 and the 22-percent decline noted in 2001.

Analysts said the sterling performances of major Asian bourses, including the Philippines, are aided by the recovery of global economies led by the US and Japan.

Analysts said most investors and fund managers are now looking ahead and positioning for 2005.

• Budget deficit continues to worsen

The ballooning budget deficit remained a major concern of investors and a big headache for the government. In fact, the worsening fiscal condition was one of the reasons why global ratings agencies decided to downgrade the country’s debt rating.

Analysts also said that the country’s worsening fiscal position has put pressure on the peso, forced the government to offer sweeter yields on its debts and diluted funding for vital development and anti-poverty projects.

For the first 11-months of the year the country’s budget deficit amounted to P160.2 billion, P21 billion below target and seven percent lower from the level recorded in the same period last year.

The better-than-expected figure for the first 11 months of 2004 boosted government confidence that the full-year deficit would be within the ceiling of about P197.8 billion or 4.2 percent of gross domestic product (GDP).

Government officials said the 11-month performance was mainly due to improvements in revenue collections because the government just barely managed to stay within its spending program.

• Threats of ratings downgrade

Major international credit rating agencies have warned that the country faces a possible downgrade if the government fails to deliver fresh revenue measures in 2004.

In response, President Arroyo has asked Congress to pass a package of tax measures to raise annual government revenues by P80 billion.

A downgrade would have raised borrowing costs for the government which relies on debt to plug the country’s budget shortfall.

In early December, Moody’s Investors Service said it is planning a two-notch downgrade for the Philippines in February unless the government is able to deliver three key measures, including the across-the-board increase in value-added tax and excise taxes on cigarettes and alcohol.

While London-based credit ratings agency Fitch Ratings did not downgrade the main credit rating as some had feared, government officials admitted that the repreive given by Fitch Ratings did not take the Philippines out of the woods.

Bangko Sentral ng Pilipinas (BSP) Governor Rafael B. Buenaventura earlier said the Philippines has until February to get the critical legislative reforms in place in order to avoid being downgraded.

Failing to pass anything at all would deliver a two-notch downgrade not only from Moody’s but possibly from Fitch and Standard and Poor’s.

• Peso plunges to historic closing low

The peso plunged to its historic closing low of P56.450 to the dollar in September last year, driven in part by a strong demand for the dollar and the weakness of regional currencies.

Soaring crude prices in the international market have weakened sharply the value of the peso against the dollar as record oil prices fueled demand for the US currency, especially among oil importers.

Analysts also said the local financial market was also besieged by what analysts perceived as negative sentiments following the President’s admission that the country was in the midst of a fiscal crisis.

Although the President’s statement was interpreted by the market as merely a wake-up call for Congress to pass urgent tax reform measures, traders said it was enough to put the local financial market in a jittery mode.

The peso has been one of Asia’s weakest currencies in 2004, dogged by worries over the countries worsening budget shortfall.