A breakout nation?
Not a few were surprised that the Philippine economy grew by 6.4 percent in the first quarter of this year—supposedly the fastest in Southeast Asia—when most analysts expected less than 5 percent. I’ve been telling my audiences that a 4-5 percent growth would be the prudent figure for planning purposes, while the more aggressive could plan around 5-6 percent. Hence, when the National Statistical Coordination Board (NSCB) announced last week that we actually made 6.4 percent, some began wondering if it’s too good to be true, or whether it’s a mere fluke.
The news was a pleasant surprise indeed, but then again, the elements for a resurgence of growth have actually been in place. First, the government has apparently gone full throttle on its spending, both for infrastructure and for regular operations. Having faced severe criticism for drastic spending reductions that impeded overall growth last year, our economic managers have resolved to make up. The first quarter saw government construction bouncing by a hefty 62.2 percent from a steep 38-percent drop same time last year. Meanwhile, government’s noninfrastructure spending on regular operations jumped by 24 percent, whereas it only inched up 1 percent last year. Just as lack of public spending impeded the economy’s growth last year, so did a renewed burst in the same provoke the unexpectedly high surge this time around.
Another key contributor to the bounce-back was the recovery from last year’s disruptive disasters in Japan and Thailand. A major factor that slowed us down last year was the triple disaster in Japan, and debilitating floods in Thailand—both of which disrupted value chains linked to our own domestic producers. For example, our vehicle assembly operations were impeded by the lack of components coming from Japanese factories shut down in the aftermath of the earthquakes, tsunami and nuclear disaster that hit northern Japan. Similarly, certain product flows from the Philippines to Japan suffered disruptions as the slowdown in economic activity in the latter impaired their absorptive capacity for our exports of both final and intermediate goods. The serious flooding that hit key manufacturing areas in Thailand precipitated a similar disruption in two-way commodity flows with that country. These disruptions had already been overcome as of the first quarter this year, and the interrupted product flows had not only been restored, but had even seen further growth.
A third key element in the bounce-back is the unmistakable resurgence in business confidence, among both domestic and foreign investors. The Bangko Sentral ng Pilipinas quarterly Business Expectations Survey shows business optimism reaching new highs. Providing independent affirmation are continuing credit outlook and ratings upgrades over the past year from Standard & Poor’s, Fitch Ratings and Moody’s Investors Service (which just last week upgraded our outlook anew from “stable” to “positive”). These suggest that the governance reforms pledged by the Aquino government are seen by the business community as credible, if not beginning to take hold. Accelerating internal revenue collections, tightened accountability mechanisms in public projects (even at the cost of last year’s dramatic slowdown), and the recent demonstration that our democratic processes are working all surely have a role in this. It is thus encouraging that foreign direct investment (FDI) applications and approvals have climbed to levels not seen in the last 16 years, based on NSCB’s latest FDI statistics. Announcements of large capital expenditure plans by publicly listed domestic companies further bolster the picture of general business optimism. All these seem oblivious to the threat of an economic crisis in Europe; we have, after all, demonstrated resilience in the face of international crisis more than once in the past.
In his international bestseller “Breakout Nations,” Ruchir Sharma, head of the emerging markets division at Morgan Stanley, names the Philippines as among the upcoming new stars in the international economic scene, the breakout nations. With Turkey and Indonesia, we make up TIP, which he sees poised to upstage the BRIC economies (Brazil, Russia, India and China), considered in recent years to be the rising stars of the world economy. But to Sharma, BRICs are losing steam, while his identified breakout nations (which also include Nigeria and Thailand) will defy expectations and speed ahead. He describes President Aquino as a good leader who is “delegating power to competent technocrats and seems to understand what needs to be done to get the lights back on.”
Sharma’s popular new book would help attract greater investor interest in the Philippines, but becoming a breakout nation will not come automatically. Much homework remains to be done, and breaking out into sustained high growth will not serve the country well unless it is growth that everyone partakes of. Sharma notes how our country’s stagnant decades had been marked by a few family-owned conglomerates dominating the markets. In his view, Turkey’s breakout is happening because of its current leadership’s drive for greater inclusiveness; under Prime Minister Erdogan, masses once excluded on account of their religious values now play a leading role in the economy. A key observation Sharma makes is that breakout nations would be distinguished by the quality of their politicians.
Is our first quarter growth performance the start of the nation’s breakout? I hesitate to bet on it until I see the politicians we vote into power next year and in 2016.
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