MANILA, OCTOBER 24, 2003 (MALAYA) The Philippines' notoriously unpredictable election season has thrown a wildcard into economists' forecasts for the economy next year, raising doubt over whether it can ride on the coat-tails of a US recovery.

Ten economists polled by Reuters gave a median forecast of 4.5 percent for gross domestic product growth in 2004, better than an expected 4.0 percent this year, but many were cautious over the election effect in one of Asia's most turbulent democracies.

Many local companies, especially those in the food and beverage sector, are looking forward to a sales boost from the local and national elections next May, stemming from traditional pump-priming and hand-outs from candidates.

"It's difficult to bring out the impact in terms of (pre-election) spending, but we do know that the candidates would have to spend for campaign paraphernalia," said Joey Cuyegkeng, economist at ING Barings Securities Philippines Inc.

The flipside is that rising political uncertainty is likely to act as a brake on foreign investment at least until the political waters clear with the election of a president, be it incumbent Gloria Macapagal Arroyo or a rival candidate.

"Because of the election there is going to be a lot of uncertainty, so there might be holding back on investments," said Luz Lorenzo, economist at ATR Kim Eng Securities.

"Exports would benefit from a US recovery, and there may be a pick-up in consumer spending."

The United States is the Philippines' largest export market.

Last month, credit rating agency Moody's Investors Service cut the outlook on four of the Philippines' key ratings to negative from stable, citing rising economic and political risk ahead of elections and after a failed July mutiny by soldiers.

"A continued deterioration in the political climate could weaken further the Philippines' external payments position," the rating agency said in a statement.

President Arroyo has helped ease uncertainty over the elections by reversing course on an earlier pledge not to stand, but other worries remain and the failed mutiny served as a reminder of the country's fragile state.

Analysts said Arroyo's decision will open the way for more vicious attacks from her political opponents.

There are also renewed worries over the government's budget deficit, which is showing signs of bulging again after Arroyo's administration had success in controlling it earlier this year.

Manila aims to limit the budget deficit to P197.8 billion ($3.6 billion) in 2004 from a goal of P202 billion this year after breaching three targets last year, but some are concerned that pre-election spending could threaten its targets.

The World Bank expects the Philippines to post economic growth of 4.2 percent in 2004 from 4.0 percent this year, the slowest growth among Southeast Asian countries after Indonesia. Officials in Manila are confident of hitting 4.2 percent GDP growth this year, rising to 4.9 to 5.8 percent in 2004.

Economists expected inflation to remain benign at 3.1 percent this year - the same as the actual average inflation rate last year - but advancing to 3.8 percent in 2004.

The median forecast trade deficit was $2.2 billion in 2004, the same as the median forecast for 2003 and against $220 million in 2002.

Reported by: Sol Jose Vanzi

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