449. Despatch From the Embassy in the Philippines to the Department of State1
SUBJECT
- Comprehensive Economic Assessment—Philippines
1. Summary
The Philippine economy is moderately improved over a year ago with national income growth probably outpacing the population increase by a small margin. The indexes of physical volume of production in manufacturing, mining and agriculture for 1959 all show moderately better performance than in the previous year. As a result of steps taken by the Government to improve the fiscal, monetary and balance of payments situation, the gap between Government income and outgo has been reduced materially, and the excessive expansion of private credit and growth of money supply have been slowed. The value of the peso has staged a rather impressive recovery, and the [Page 959] country’s dangerously depleted foreign exchange reserves have partially recovered as a result of a substantial balance of payments surplus on current account. No progress has been made, however, toward eliminating the graft ridden and uneconomic system of import and exchange controls. Despite the 25 percent margin, which in effect was partial devaluation although this is denied by the Administration, the demand for foreign exchange continues greatly to exceed earnings, and there seems little likelihood that controls can be relaxed without further devaluation. The Government, nevertheless, appears to be contemplating some concessions to growing pressures for an easing of exchange controls, but it seems likely still to hold out against adoption of a realistic exchange rate. Rather, the Administration through adoption of some exchange retention scheme or schemes, probably will continue to move toward an increasingly fragmented exchange rate system.
Gross National Product at 1955 prices is estimated by the National Economic Council to have gained seven percent in 1959 as against 1.9 percent in 1958, although the NEC figure for 1959 may prove high. Agricultural production increased in physical volume in 1959 by nearly four percent as compared with less than one percent the previous year; most agricultural export crops gained in both volume and value, and the total value of agricultural export crops was up 16 percent compared with the previous year. Mining is estimated to have made a gain of about 14 percent in physical volume of production, and manufacturing is up probably close to 10 percent. New investment in partnerships and corporations in 1959 ran 24 percent over that for 1958, and private building construction in Manila was up 17 percent.
The Philippines both through the highest level of exports on record and through the exercise of rigid control over imports achieved a $5 million surplus on merchandise account in 1959, according to preliminary Central Bank balance of payments estimates. The composition of Philippine trade, for both exports and imports, was generally similar to that for 1958, although for imports both continued industrialization and the general improvement in agricultural production effected some changes within and among commodity groups. The United States’ share in the Philippine import market continued declining, and Japan’s rising. The United States took approximately the same share of Philippine exports as in the previous year, while Japan’s share increased. Other changes in the geographic pattern of Philippine imports and exports were relatively minor.
The Philippine Government’s FY 1961 budget and fiscal plan provides for total expenditure of 1,243 million pesos to be financed from existing revenues plus 91 million pesos in borrowings. This 91 million peso planned deficit for FY 1961 is somewhat larger than the [Page 960] 72 million pesos expected for FY 1960, but is considerably lower than the rate of deficit financing in earlier years. Planned total expenditures under the fiscal plan exceed those of the previous year by 75 million pesos.
The upsurge of economic nationalism in the Philippines was given new impetus in the latter half of 1959 when the “Filipino First” policy was officially adopted by the Government’s Nacionalista Party Administration. It still, however, is largely undefined as to scope and intensity. Government spokesmen on the one hand assure that it will not be punitive to aliens, will not be discriminatory, and will give due cognizance to existing international commitments. On the other hand, Government officials speaking for domestic consumption advocate the exercise of the Filipino First policy both in terms and to degrees which are immoderate. Filipino First as implemented by Government agencies is increasingly raising barriers against the entry of foreign capital and doubt is growing as to the verity of Government assurances that foreign investment is welcome and wanted. Until these doubts are dispelled the inflow of new private foreign investment probably will continue to be negligible. Americans in business in the Philippines are likely increasingly to feel the effects of the Filipino First policy if the Government follows its apparent present inclination to look more closely at the provisions of the Revised Trade Agreement in order to ensure that preferential treatment accorded Americans in specific instances does not exceed minimum commitments.
General economic conditions probably will continue over the next few months at about present levels. The probable course of economic developments beyond mid–1960, however, is dependent on the outcome of present Government deliberations on some major questions of economic policy. If the Government resorts to some sort of partial decontrol through a currency retention system, it well may add to existing pressures on the balance of payments. Some easing of commercial credit restrictions are also a possibility despite present Central Bank opposition and could further increase the still excessive expansion of credit in the private sector. In short, changes in credit and foreign exchange policies presently under consideration by the Administration if adopted could undo the gains of the past year and once again hasten the process of general financial deterioration.
[Here follow the remaining sections of the despatch.]
First Secretary of Embassy
- Source: Department of State, Central Files, 896.00/3–1160. Confidential; Air Priority. Approved by Henry Drodie, Counselor of the Embassy for Economic Affairs.↩