The Philippines: where it’s at – economically
We’re heading for an economic crisis. Inflation is out of control, foreign funds are fleeing, the peso is sinking, international agencies are downgrading the GDP growth rate.
These are the headlines.
But maybe we should look at this a little more dispassionately. Let’s take the GDP first. Economists have downgraded their 2018 forecast from 6.5-7 percent to 6-6.5 percent, and media have gone bananas over it; “the sky is falling,” they say.
But in the Marcos years, we were averaging only 2.1 percent, improving slightly in the 1990s (after Marcos fled) to 3.1 percent, with a further acceleration in the early 2000s. It was buoyed up during this time by a favorable Asian economic situation, and deregulation and liberalization that were started under Ramos. GDP growth rose markedly to 4.8 percent annually in the first decade of the 21st century.
Economic growth continued to accelerate in the present decade, averaging 6.2 percent from 2010 to 2016 despite a challenging global environment that saw the weakening of most economies in the world. In the past five years (2013-2017), the Philippines uncharacteristically became one of the fastest-growing market economies in Asia, averaging 6.6 percent in that period.
So a slight slowdown, to near the mid-6 percent from 6.7 percent in 2017, is not such a bad thing. It only would be if it were the beginning of a longer term downtrend, which it isn’t.
A widening trade gap as imports outpace unexpectedly low exports is due on the import side to the building of more infrastructure and expanding production capacity (a very good thing), although coupled on the export side with a deceleration in the IT-BPM (business process management) industry, and a slowing of export of manufactured products (not a good thing—this needs to be investigated and fixed).
While electronics is holding up, what worries me is the flattening out of agriculture. It’s a sector that has not been given by any government the attention it must have. GDP growth could be in the 7-percent range if agriculture was growing at the rate it should. The number could even be accelerated beyond that if the sector was pulling its weight.
As to the nine-year high inflation, particularly its impact on food and transport: The first of the tax reforms (TRAIN 1) has been blamed in media, but its impact was small. It was unfortunate timing that created the relationship. Oil prices rose by 22 percent, and gross rice mismanagement led to about a 20-percent increase in the price of the staple.
Inflation is expected to return to its normal range (2-4 percent) within the next two years, if not next year. But the BSP’s move to raise interest rates to check inflation could keep economic growth at the mid-6-percent level. The move was necessary, but will put a damper on growth as people and companies won’t spend as much as they should. The more-than-usual fall in the exchange rate didn’t help, although it did give a windfall to OFWs and exporters.
Business seems to have picked up the more positive attitude in the community, with foreign direct investments (FDIs) last year reaching $10 billion, up 21.4 percent from 2016. This year, so far, it’s been much the same. In the first seven months, FDIs rose 52 percent to $6.7 billion—and this despite the uncertainty created by Congress not finalizing what taxes companies will pay. In the previous administration, FDIs averaged $4 billion per year.
The much-maligned tax reforms are proving to be successful in providing momentum to the government’s “Build, build, build” infrastructure program. TRAIN 1 has added at least P90 billion to government revenues. Some 75 major projects have been identified, and seven have started construction while 43 are under implementation (budgeting, procurement, etc.). Another nine projects not in the 75 are also underway.
There’s a predilection by government toward official development assistance funding, but it is expected that a number of projects will still be carried out under the public-private partnership scheme, allowing projects to be built by the private sector. It’s something the government should do more of if it wants to best use its limited funds.
So we, at Wallace Business Forum, see it as a pretty stable economy. But, as in previous administrations, the challenge of making economic growth inclusive remains. Duterte’s economic team has done a bit of it with the free college education law and unconditional cash transfers; it’s also pushing to expand health services and intensify infrastructure construction across the country.
The direction is right, but the goal is still some way off.
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