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First task: Fixing the economy

/ 04:40 AM May 16, 2022

The government last week reported that the economy, as measured by the country’s gross domestic product (GDP), expanded by a stronger-than-expected 8.3 percent in the first quarter, the fastest pace in the region that brought the Philippines’ output back to pre-pandemic levels. The growth has been traced to increased consumer spending following the reopening of more business establishments, as well as increased production as more economic sectors—especially manufacturing, wholesale and retail trade, and transportation — escalated operations.

While the robust first-quarter economic performance puts the country on track to hit the 7-9 percent GDP growth target for 2022, Socioeconomic Planning Secretary Karl Kendrick Chua pointed out the need for the succeeding administration to continue the policy reforms instituted by the Duterte administration. To avoid a possible reversal in economic growth, Chua suggested that the incoming Ferdinand Marcos Jr. administration should build on the inroads started by his predecessor.

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Not a few economists are worried about how the presumptive President would handle the economy, given the very few details so far revealed about his economic agenda. Experts have suggested that Marcos Jr. should take another look into his campaign promise to suspend the rice tariffication law and increase government cash aid to vulnerable sectors badly hit by the prolonged pandemic as these would put pressure on the government’s limited resources. Economic think tanks have warned that these acts could further increase the country’s already swollen debt and put the Philippines’ investment-grade credit ratings at risk.

In a May 10 report, Oxford Economics assistant economist Makoto Tsuchiya and lead economist Sian Fenner warned that distributing more cash aid will result in an expansionary fiscal policy that, in turn, can lead to bigger debts and budget deficits.

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Chua also explained that only targeted subsidies for the poor work, while liberalized rice trade since 2019 not only brought down the price of this staple but also provided billions of pesos in financial support to local farmers hurt by the influx of cheaper imports.

Overall, economists believe that the son and namesake of the late strongman will inherit an economy that is on the road to recovery. As Chua noted, the growth target for 2022 is achievable, although “heightened” external risks such as Russia’s invasion of Ukraine, an economic slowdown in China—the Philippines’ top trading partner—as well as forthcoming interest rate hikes in the United States pose a risk to sustaining economic growth.

Foremost among the concerns is inflation. Expensive oil and high food prices have pushed inflation, or the rate of increase in prices of essential goods and services, to 4.9 percent in April, the highest since the 5.2 percent recorded in December 2018. There is not much that can be done to control petroleum prices at the pump as the country is dependent on imports for basically all its needs. But for food prices, economists have pointed to bottlenecks in distribution as a major contributor to rising costs. As for supply shortfalls, the government has always resorted to imports instead of promoting local production. This policy has to be reversed since dependence on imports subjects the country to more external risks beyond its control.

Then, there is the debt problem. As loans piled up at a faster pace than the first-quarter economic growth, the Philippines’ outstanding obligations of P12.68 trillion as of end-March worsened to a 63.5 percent share of GDP, the highest since the 65.7 percent level in 2005. The national government’s outstanding debt is expected to climb to a new record-high of P13.42 trillion by year’s end. This means that even if the economy grows by 7-9 percent as targeted, the debt-to-GDP ratio—a measure of a country’s capacity to repay its obligations—is projected at 60.9 percent, still above the 60-percent threshold that credit watchdogs consider prudent.

Marcos Jr. enjoys the mandate of a big majority and is expected to have better relations with the legislature after the opposition was decimated in the May 10 elections. He should put this to good use by managing the economy toward a more stable footing. A vibrant economy will address many of the other social problems that beset the country. For instance, booming businesses should lead to more jobs and address unemployment. It should also lead to increased tax collections that, in turn, should be used to finance programs and projects to alleviate poverty and substandard education. Increased revenues will likewise allow the government to cut down on borrowings and bring down the debt-to-GDP ratio to more judicious levels.

Many of the problems afflicting the country may look daunting, but focusing on the economy is the first step to eventually resolving them. Confidence in the incoming administration’s economic policies and its economic team will go a long way in ensuring that the country will be on track to achieving this urgent goal.

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TAGS: economy, Editorial, Ferdinand Marcos Jr
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