While the external position is expected to remain strong, prospects for achieving sustained growth and expanded employment opportunities hinge on the realization of higher private sector investment with substantial foreign participation. The current economic slowdown may soon run its course, but recovery is likely to remain subdued with that of external demand so that real GDP growth drops from almost 9 percent in 2000 to 3 percent this year and firms only moderately to 4 percent next year. Sharply increased debt and debt-servicing costs since the February financial crisis have severely complicated economic management. The softening in economic activity over the past year is likely to be halted by tax cuts, lower interest rates and improved agricultural performance, but lingering structural impediments and a more moderate export performance suggest that real GDP growth will remain around 5 percent this year and next. However, unemployment remains high and the achievement of substantially faster growth has proved elusive.
Prospects continue to be constrained by low domestic saving and weak foreign investment inflows.
Widespread dislocations created by mismanagement and neglect of the Estrada administration, however, are likely to impede growth over the near term. The government has again turned to expansionary fiscal measures to counter the abrupt slowdown caused by the drop-off in exports, but the current policy mix and renewed weakness in the neighboring currencies risk reinforcing rising market expectations for a realignment of the exchange rate peg. An eroding trade balance and contagion from Argentina have put pressure on the exchange rate, worsening inflation prospects and inducing monetary tightening. This and electricity rationing forced by drought will curb this year's output growth, which along with currency depreciation and higher interest rates will widen the fiscal deficit. A large fiscal deficit poses increasing risks for strong output to be sustainable over the medium term, however.