CHAPTER 2

Environmental Analysis
Philippine Economy The Republic of the Philippines is located in Southeast Asia and Manila is its capital city. The country comprises 7,107 islands and ranks as the 12th most populous country in the world. Like most other southeast Asian regions, the Philippines too has a history of European colonization. It was a colony of Spain and the USA. The country is now home to multiple cultures and traditional ethnicities. It is also looked upon as a perfect example of a 'mixed economy'. Industrialization is a new development in the Philippines. Traditionally, the economy stabilized on the agrarian contributions and the manufacture of garments, pharmaceutical products and semiconductors. In the last decade, electronic exports added tothe exports, including various products obtained by mining

The Philippines has encountered a major decline in economic growth - from being one of the richest Asian countriesafter the end of World War II, to being one of the poorest at present. There are several factors that led to the economic situation the Philippines has now, and one of these is the political volatility and mismanagement by government leaders

Agriculture and Forestry

Arable farmland comprises more than 40% of the total land area. Although the Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing, and government policies have limited productivity gains. Philippine farms produce food crops for domestic consumption and cash crops for export. The agricultural sector employs more than one-third of the work force but provides less than a fifth of GDP. Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. Although the government has instituted conservation programs, deforestation remains a severe problem. With its 7,107 islands, the Philippines owns a diverse range of fishing areas. Notwithstanding good prospects for marine fisheries, the industry continues to face a difficult future due to destructive fishing methods, a lack of funds, and inadequate government support.

Agriculture generally suffers from low productivity, low economies of scale, and inadequate infrastructure support. The sector grew only 0.1% in real terms during 2009, dragged down by a 2.8% decline in the fourth quarter because of the adverse effects of successive strong typhoons. The crops sector (which contributes over 45% of total agricultural production) contracted by 1.4% from 2008, offsetting the recovery of the livestock sector and gains from the fisheries and poultry sectors. In 2008, the agricultural sectors slow growth of 3.9% was attributed to the negative growth in the livestock sector and lesser output in the crops and fisheries subsector.

Industry

Industrial production is centered on the processing and assembly operations of the following: food, beverages, tobacco, rubber and plastic products, textiles and textile products, clothing and footwear, leather products, pharmaceuticals, paints, wood and wood products, paper and paper products, printing and publishing, furniture and fixtures, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass and glass products, industrial chemicals, fertilizers, iron and steel, fabricated metal products, mineral products, machinery and equipment, transport equipment, and refined petroleum products. Newer industries, particularly production of semiconductors and other intermediate goods for incorporation into consumer electronics are important components of Philippine exports and are located in special export processing zones . The industrial sector is concentrated in urban areas, especially in the metropolitan Manila region, and has only weak linkages to the rural economy. Inadequate infrastructure, transportation, and communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements.The Philippines business process outsourcing (BPO) industry currently accounts for about 15% of the global outsourcing market and has been the fastest-growing segment of the Philippine economy.

BPO in the Philippines has expanded over the years, which accounts as one of the main contributors to the Philippine economy. As a matter of fact, offshore staffing in Manila has proven to greatly minimize the unemployment rate by providing jobs to hundreds of thousands of Filipinos. It has also widened the sphere of employability since even young people who havent graduated yet from school, housewives, and even retirees are given the equal opportunity to get work from outsourcing. This has helped enable thousands of individuals provide a comfortable lifestyle to their families.BPO companies were initially established in the Philippines major cities including Manila, Davao, Cebu, and Cagayan

Mining

The Philippines is one of the world's most highly mineralized countries, with untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold, and chromate deposits are among the largest in the world. Other important minerals include nickel, silver, coal, gypsum, and sulphur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. The discovery of natural gas reserves off Palawan has been brought on-line to generate electricity.

Major Economic Problems of the Philippines

Import-Export Imbalance: Among the many economic problems faced by the Philippines, one is the imbalance of imports and exports. The negative trade is heavy and only counterbalanced by the service account surplus. Over the last two decades, Philippine exports have shifted from commodity-based products to manufactured goods. However, in the midst of the current global economic recession, the exports of electronics, garments and textiles are yet to reach a level of import neutralization.

Decline of the Philippine Peso: The economic downturn has resulted in the devaluation of the Philippine peso and subsequently, a fall in the stock market. The fiscal conservatism strategy adopted by the Philippine government has yet to reflect a positive effect on acceleration of economic growth. 6%growth in the gross domestic product (GDP) in 2004 and 7.3% in 2007 has yet to accelerate to the linear GDP growth projected by the government.

Reliance on Remittances: President Gloria Macapagal-Arroyo has pledged complete development of the economy by the year 2020. There have been a number of tax reforms put in place, along side extensive asset privatization. Nevertheless, Philippines' dependency on remittances from non-resident investors is large. Neighboring competitors have been siphoning away big investors in infrastructure and outsourcing. This has resulted in an uneven regional development

Global Economy The world economy, or global economy, generally refers to the economy, which is based on economies of all of the world's countries, national economies. Also global economy can be seen as the economy of global society and national economies as economies of local societies, making the global one. In 2011, the largest economies in the world are the United States, China, Japan, Germany, France and the United Kingdom. The rise in commodity prices, combined with the rapid closing of output gaps and strong capital inflows has contributed to an acceleration of inflation throughout the developing world. Headline inflation in developing countries neared 7 percent (year-over-year) in April 2011, a more than 3 percentage point increase since low points in July 2009, when concerns of deflation were paramount. Headline inflation (y-o-y) in high-income countries has also picked up, reaching 2.8 percent in April 2011. Monthly inflation accelerated more starkly, reaching a 9.1 percent annualized pace among developing countries in the 3 months ending in January 2011. Since then, the pace of inflation has eased to around 6.7 percent in April, and to 4.3 percent in highincome countries. The extent of the increase and its main determinants varies markedly across countries, with inflation having increased by 10 percentage points or more over the past 12 months in the Democratic Republic of Congo, Ethiopia, the Kyrgyz Republic, Bolivia, and Mongolia. Year-over-year headline inflation increased during this period by 3 or more percentage points in 33 of the 93 developing countries for which data are available. However, the extent of the pickup in inflation in most countries has been modest. Inflation rates in 55 percent of developing countries remain below their average

rate of the pre-crisis period (January 2000 through August 2008). And inflation is less than 2 percentage points higher than that average in 80 percent of countries. The biggest acceleration has been in the East Asia and Pacific- and Middle-East and North African regions, reflecting capacity constraints in the former and food prices in the latter. While on a year-over-year basis inflation has eased in South Asia and Europe and Central Asia, monthly data suggests that price pressures remain strong in South Asia and are rising in Africa, with the pace of increase in the first quarter of 2011 exceeding 15 percent in South Asia and close to 10 percent in Sub-Saharan Africa. Rising food and fuel prices have also been associated with significant increases in food and fuel subsidiesboth implicitly as the gap between market and controlled prices increases and because of the imposition of new policies to alleviate the impact of the price hikes. Several countries in the Middle-East and North Africa increased food and/or fuel subsidies (Algeria, Egypt, Jordan, Morocco, Syria and Tunisia), with associated increases in government deficits exceeding 2 percent of GDP in many instances. Rising food and fuel prices have also increased subsidy spending in several Asian economies, including India, Pakistan and Indonesia. Responding to the rise in inflation and the closing of output gaps, authorities in many developing countries have begun the process of adjusting macroeconomic policy, which had been loosened in the wake of the financial crisis, to a more neutral stance.

Economic Outlook for the coming year 2012 The global economy is moving to slightly lower growth, and slightly higher inflation trajectories. However, the transition has become more turbulent because of the increasingly unsettled conditions around the world triggered by the convergence of a variety of cyclical and structural economic problems in many regions, recurring sovereign debt strains, and ongoing geopolitical problems.

This months forecast changes include some small downward revisions to the macroeconomic outlook for the major economies around the world. In the case of the United States and Canada, the early-year weakness in economic activity reduces average output growth in 2011 despite a second-half rebound, with the softer performance spilling over into 2012. We have similarly lowered our forecast for U.K. growth in 2011-12 following a weak Q2 performance and expectations of a continued sluggish recovery amid aggressive fiscal consolidation and slower export momentum.

A more cautious investment climate in Peru in the wake of the recent presidential election has also prompted us to lower the countrys growth forecast by roughly a percentage this year and next, to 6.0% and 5.8%, respectively underlying price trends are expected to continue to creep higher, reflecting the spillover effects from prior commodity price gains, and the gradual upward bias in labour costs associated with skilled labour shortages in a number of sectors and regions. The lagged impact of rising commodity costs adds to this years total inflation bill, but headline inflation rates should moderate in 2012 as high oil and food costs level out (at least temporarily).

From a policy perspective, the softening in employment trends in both the United States and Canada, coupled with the increased turbulence in global financial markets, are likely to keep overnight rates low for longer. We now expect that the Federal Reserve will begin to raise the funds rate in the third quarter of 2012, six months later than our long-held view, as the current soft patch gives way to a renewed strengthening in activity. Accordingly, the Bank of Canada should resume its normalization of shortterm interest rates in the second quarter of next year, three months in advance of the Fed, a development that keeps cross-border spreads from widening significantly. With the U.K. economy bearing the brunt of increasing fiscal consolidation, the Bank of England is likely to push out raising its benchmark repo rate until the first half of 2012. .