2018’s economic drivers and spoilers

Economic momentum slowed down in the third quarter of 2018, with the underperformance of agriculture and the unprecedented increase in inflation, along with weaker exports and declining competitiveness, becoming growth spoilers.

The third-quarter growth rate at 6.1 percent was the slowest since 2015. This brought the average growth rate to 6.3 percent. To reach the government’s low-end target of 6.5 percent for 2018, the economic managers were hoping the economy would grow by 7 percent in the last quarter.

After a strong performance in 2017, exports contracted by 1.2 percent from January to October 2018. Electronic products, the country’s main exports, continued to grow, but failed to offset the contractions in almost all other top commodities, such as other manufactured goods, machinery and transport equipment, ignition wiring sets, mineral products and coconut oil. Banana exports, however, increased by 17.5 percent for the first 10 months of 2018, with increased receipts from China.

Exporters attributed the contraction to both internal and external factors, such as the higher costs of raw materials and production resulting from increased salaries, the US-China trade war, volatile global oil prices and the government’s tax reform program. Imports, on the other hand, expanded by 16.8 percent for the first 10 months of 2018, with the increased inflow of capital goods and raw materials and intermediate goods.

Foreign direct investments have so far been the biggest contributor to growth, growing by more than 24 percent in the first three quarters of 2018—higher than the 6.9-percent growth rate for the same period in 2017.

While the government remains optimistic that the country will reach at least 6.7 percent in 2019 because of the midterm elections in May, an international credit rating agency and some multilateral lending institutions have downgraded their Philippine growth forecasts for 2018 and 2019. The World Bank trimmed its growth projections to 6.4 percent from 6.5 percent in 2018, and to 6.5 percent from 6.7 percent for 2019. Fitch Solutions, on the other hand, lowered its forecast for gross domestic product growth to 6.2 percent in 2018, and to 6.1 percent for 2019, from the previous 6.3 percent. The Asian Development Bank also revised its initial expectations from 6.8 percent to 6.4 percent in 2018, and from 6.9 percent to 6.7 percent for 2019.

The economic managers’ optimism is anchored on the legislative reforms they have been pushing, and the positive developments in the global oil market. The passage of the Rice Tariffication Bill and the Ease of Doing Business Act, and the approval of the 11th Foreign Investment Negative List, are crucial reforms that can bring back the economy on track. The Rice Tariffication measure is aimed at reducing rice prices by up to P7 per kilo. Meanwhile, the Ease of Doing Business Act and the 11th Foreign Investment Negative List are expected to improve investor confidence and the business environment.

The economic slowdown in 2018 was a wake-up call for the Duterte administration. The situation has stabilized somewhat, but it remains a challenge to the country’s economic managers, business sector and policymakers that the economy requires constant boosts in productivity. Moreover, there is a need to urgently address structural weaknesses that have hampered sustained growth, among them low agricultural productivity, weak export growth and an undiversified export base.

The World Bank has recommended that the Philippines focus on three areas of reforms: improving market competition through regulatory reforms, simplifying regulations for trade and investments, and reducing labor market rigidities and costs.

The positive positioning for an economically productive year lies in between regulation and nonregulation, in between state and market collaboration. The expansion of market forces can be facilitated directly by government policies, which open institutional and territorial levels of engagement where action-oriented responses to economic governance can be realized. However, only with a consistent policy environment will big investments for job-creating enterprises thrive.

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Dindo Manhit is president of Stratbase ADR Institute.