Factors contributing to the higher than expected GDP figures include sustained consumption; increased growth of the private sector in real estate development and construction supported by low interest rates; a better business outlook for infrastructure investment and additional electric generating capacities; and increased government repair, maintenance and improvements to existing roadways and bridges.

The Philippines has become an alternative site for foreign investment, especially among Japanese companies. The availability of English-speaking workers, the relatively good experience of previous investments, the prospects for the ASEAN Free Trade arrangements by 2015, and ASEAN linkages with major markets in Asia are all positive factors for attracting foreign investment. Some of these projects are quite substantial and will challenge the coordination and capacity of government at the national and local level.

With reference to portfolio investments, the Philippine Stock Exchange index had an increase of 24 per cent since the beginning of 2012. The influx of portfolio investments has resulted in the appreciation of the peso, and monetary authorities are concerned about the competitiveness of exports of goods and services and the effect on overseas remittances for family expenditures. The Central Bank (BSP) had been taking measures to avoid the fast appreciation of the peso by sterilising funds in a special deposit account — but this is a costly exercise. The BSP is now considering some form of capital control such as imposing a deposit requirement for 90 days before sale proceeds can be remitted abroad.

The budget outlays for public construction have been utilised below the target deficit of 3 per cent of GDP. For the first 10 months the budget gap had only reached 2.3 per cent of GDP. The BSP has encouraged the government to prepay debt, borrow domestically in foreign exchange and in pesos, and spend more to create demand for capital equipment imports and other materials for investment projects so as to prevent the rapid appreciation of the peso. The BSP is also closely monitoring real estate financing by banks.

But the majority of the Philippines trade is with economies that have slowed and will probably not recover in 2013, most notably the US, Europe and Japan. And despite estimates that the Chinese economy will grow at around 8 per cent, the Philippines–China bilateral relationship is not stable. Disputes in the South China/ West Philippine seas have resulted in China banning some Philippine exports and restrictions on Chinese tourists visiting the Philippines. Proposals have been made to resolve this issue within the framework of the United Nations Convention on the Law of the Sea but China has not accepted this and continues to press for bilateral negotiation only.

The main domestic challenge that faces the Philippines today is how to increase employment so as to reduce poverty — especially in rural areas. For inclusive development, agricultural and rural projects need to be pursued, including the establishment of factories processing local produce. With the foreseeable end of land distribution schemes under the Comprehensive Land Reform Program, there is scope for restarting corporate investment in agricultural production and processing. Small-scale farming by land reform beneficiaries has not improved productivity. These farmers are still servicing their indebtedness for their land purchase and crop loans, and have been exposed to climatic-change risks, for which they are not adequately covered by crop insurance.

A major achievement of negotiations between the national government panel and the Moro Islamic Liberation Front has been the signing of a Framework Agreement for Peace on the Bangsamoro. A transition commission is to be formed to draft the basic law for Bangsamoro local governance. The Philippines will hold elections in May 2013 for 12 senators (which is half the number of nationally elected senators), around 285 district and party representatives of the House of Representatives, and all local government officials. The passage of the 2014 budget bill for sustainable growth will be of prime importance for the new Congress. Thus the drafting of the Bangsamoro Basic Law will take time, and there will be a need for a plebiscite for its adoption. A basic law for Bangsamoro will be a good start in resolving the various issues in Southern Philippines, but ultimately good governance will be needed to attain economic and social improvements that are the real peace and development dividends.

The projected 2013 GDP growth of around 7–7.5 per cent will be better than in 2012, considering that consumption levels will be reinforced by election spending and continuous business expansion due to increasing investments from local and foreign sources, and will be further boosted by increased infrastructure outlays by the government and the private sector. Hopefully climatic change will not be severe enough to have a significant effect on agricultural production.

Cesar E. A. Virata is president and chairman of C. Virata & Associates, incorporated management consultants, and former Prime Minister of the Philippines

This is part of a special feature on 2012 in review and the year ahead.