Kinks in the economy

After the euphoria-inducing investment-grade rating given to the Philippines during the Lenten break, a string of not-so-good news has hit the economic front. Foreign direct investments—or money that goes into productive undertakings like tourism, agriculture, or industrial projects—registered a net inflow of $576 million in January, down by nearly half from $1.05 billion posted in January last year. Merchandise exports fell 15.6 percent in February, the steepest decline in more than a year, according to the National Statistics Office (NSO). Growth in manufacturing output likewise eased to 8.7 percent in February, after posting double-digit growth in the previous month, as domestic and global demand for local goods declined.

Revenues from exports declined to $3.74 billion in February from $4.43 billion a year ago. The drop was reported to be the biggest since December 2011, when exports contracted by 18.9 percent. The latest data brought total exports in the first two months of 2013 to $7.75 billion, down 9.4 percent from $8.55 billion in 2012. Global bank HSBC has expressed concern that the decline in electronic exports could indicate that the Philippines is losing its competitiveness in semiconductors, and noted that the first two months of the year showed electronics falling by more than 30 percent. Electronics shipments—which accounted for 39.7 percent of total export earnings—shrank by 36 percent to $1.48 billion in February from $2.33 billion a year ago. The NSO observed that the double-digit decline in electronics exports was also the steepest since the 36.6-percent drop in October 2011.

Businessmen were quick to blame the peso’s strong performance for the decline in exports and local manufacturing output. Donald Dee, vice chair of the Philippine Chamber of Commerce and Industry, was quoted as saying that the peso’s appreciation weighed on local production even as consumption was driving demand; he pointed out that prices of imported goods had become more competitive than those of locally made products. The peso averaged 40.67 to a dollar in February, as against 42.66 in the same month last year.

The peso’s strength is due to the continued remittances from overseas Filipinos and investments in the BPO (business process outsourcing) sector. Add to that the fact that the Philippines is attracting the “wrong” or “unproductive” kind of money. The net inflow of foreign portfolio investments to the Philippines reached $1.09 billion in the first quarter, more than double the $464.45 million registered in the same period last year, according to the Bangko Sentral ng Pilipinas. This is money put mainly in local stocks, which have been experiencing a bull run. It is called “hot money” because of its fickle nature: It can leave as easily as it came in.

And these are not the only kinks in the economy. There are the delays in big infrastructure projects under the Aquino administration’s flagship Public-Private Partnership (PPP) program, including the expansion of the Mactan airport and other regional air terminals, and the connector road for the north and south Luzon expressways. Even the acquisition of additional coaches for the MRT 3 on Edsa is just taking too long. Also, investments in the mining sector are on hold due to the absence of new guidelines to govern the industry.

Governance-wise, the Aquino administration has accomplished a lot in just three years in office. But on the economic front, it has much to do to draw in real foreign investments, boost exports, enhance the agriculture and tourism sectors, and truly strengthen and maintain a resilient domestic economy. Perhaps it can start by listing the structural reforms that it intends to initiate for its remaining three years.

In the past decades, neighbors like Thailand and Malaysia have overtaken the Philippines economically. Bloomberg reported last week that Vietnam’s stock market—a barometer of business expectations for the next year or so—is now being favored by many investors after its communist government promised to open up the economy. Vietnam is preparing to remove bad debts from the banking sector, ease restrictions on foreign ownership of listed businesses, and change its constitution to limit the “leading role” of state companies that comprise about a third of the gross domestic product (GDP), Bloomberg said.

We should not wait for Vietnam to overtake us this time.