Disturbing slowdown

News of even slower economic growth in the second quarter came as a surprise to many, but the latest 5.5 percent reported growth in our gross domestic product (GDP) has begun to reflect a disturbing trend that we must find a way to arrest. What makes the numbers surprising is that the factor widely blamed for the previous quarter’s similar slowdown was expected to have already been deliberately addressed and compensated for.

The main culprit then was the delayed passage of the 2019 budget, forcing the government to base disbursements on the previous year’s reenacted budget, giving no room for new spending on new initiatives and projects. This supposedly held back substantial disbursements on new and ongoing infrastructure projects, spending that would have translated to a great demand for various goods and services that would then boost our GDP accounts.

The budget was finally passed early in the second quarter, so that should have unleashed new spending to catch up with the backlog, hence speed up economic growth, right? Well, not quite. The numbers don’t show that expected result, but rather, the exact opposite. The GDP data on public construction expenditure growth, which reflect government’s infrastructure spending, actually turned even more negative in the second quarter, worsening from -8.6 percent to a more than threefold decline, or
-27.2 percent! Rather than catch up, as it should have with the budget already approved, infrastructure spending actually fell even farther behind in the second quarter, leading to a first semester double-digit drop (-22.1 percent).

This lends credence to my earlier observation (“Losing steam?” 5/14/19) that there was more to the first quarter slowdown than the budget delay. That could no longer have been the reason in the second quarter, and yet infrastructure implementation fell behind even further. I am thus led to believe that the capability of our infrastructure agencies to rise up to the challenge of executing the ambitious “Build, build, build” (BBB) program of the administration must be seriously examined, and quickly improved.

The question on the absorptive capacity of our key infrastructure agencies, namely the Department of Public Works and Highways (DPWH) and the Department of Transportation (DOTr), came to the fore when their 2017 Commission on Audit (COA) reports were made public in the COA website (thank God for transparency!). It showed that the DPWH only managed to spend a third (34.1 percent) of its budget in that year, while the DOTr did even worse, spending only a fourth (25.6 percent), citing a host of lapses and reasons for delayed project implementation. This glaring finding provoked promises and assurances that these agencies would shape up and catch up the following year, lest BBB turn into a huge embarrassment.

Guess what—the 2018 COA audit results are out, and things aren’t any better. In fact, they’ve gotten worse for the DOTr, which the COA reports to have disbursed only one-fifth (20.6 percent) of its 2018 budget allocation. The full audit report for the DPWH is not yet accessible at the COA website, but a summary publication shows its disbursement rate to have only slightly improved to 39.2 percent. To be fair, the DPWH saw its budget grow sixfold since 2010, even as it underwent a reorganization that significantly reduced the number of its personnel. Thus, to expect it to effectively implement a massively increased public infrastructure portfolio seemed misplaced, to say the least.

Government may now be rethinking its earlier move away from public-private partnerships (PPP) in infrastructure, with San Miguel having received the green light for its Bulacan airport proposal. Expect government to use more PPP for BBB—it now has no choice.

There are other reasons for the second quarter economic slowdown, including the US-China trade war, and slowing inflows that I wrote about last month. All told, I find little if any basis to expect a second half rebound to happen. Alas, after sustaining 6-7 percent growth for eight years, we’ll now have to resign to growing at less than 6 percent. I will have to write separately about things we might do to get out of this slump.

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