Road bumps to recovery

It’s bad enough that our economy sank the lowest in our neighborhood as a result of the pandemic. But getting back on track is also made even tougher by “road bumps” along our way to recovery.

What are some of the road bumps? Our inability to attract more job-creating foreign direct investments is one. Our annual FDI inflows were already sliding long before COVID-19. After peaking at $10.3 billion in 2017, it fell to $9.9 billion in 2018, $8.7 billion in 2019 and $6.5 billion last year. As of the first quarter, it remains lower than in the same period a year ago. At the same time, we get much less of it than our comparable Asean neighbors especially Singapore, Vietnam, Thailand, and Indonesia. Our traditional turnoffs have mainly been our inferior infrastructure (especially in the now all-important internet connectivity), and governance weaknesses marked by policy reversals, higher perceived rates of corruption, and more. Policy uncertainty with the protracted legislative process to pass the government’s tax reform program didn’t help either.

Another road bump related to the first is the large number of business closures since the severe lockdowns crippled our economy last year. Secretary Ramon Lopez told lawmakers in a hearing last September that 90,000 businesses, or six percent of the country’s total, had remained closed for half a year. An Asian Development Bank study reported that 71 percent of micro, small, and medium enterprises in the Philippines were forced to temporarily close due to the pandemic, much higher than in our Asean neighbors. Large businesses have not been spared. Nissan ceased its auto assembly operations in the country last March, while Philippine Airlines announced cutting 2,300 jobs, and is now reportedly eyeing filing for bankruptcy under US laws to protect itself from its creditors. News like these makes it even more challenging to attract new investments from foreign and local investors alike.

A third road bump is our accelerating prices, with recent months’ inflation rates topping the upper limit of government’s 2-4 percent target range. While it’s clearly a supply-induced inflation tracing to drastic reduction in domestic pork supplies due to the African swine fever pandemic, the Bangko Sentral may well be forced to tighten money supply and raise interest rates to rein it in. That would in turn have a choking effect on the economy, reducing borrowing by both consumers and producers, while higher inflation in itself has the same effect, with rising prices dampening consumer spending. This is why government sees it urgent to ease short-term supply limitations via easier importation of pork: Economy-wide repercussions are far more than sectoral interests may appreciate.

Yet another road bump is the rising value of the peso, or the lower peso-dollar exchange rate. I studiously avoid saying “strong” to describe such peso movement, because the word misleadingly connotes something positive, whereas more Filipinos are actually hurt when its value goes up than when it goes down. Families of overseas Filipino workers get less pesos from remittances their loved ones send from abroad. Export producers and their workers are hurt as their export dollars fetch lower amounts in pesos. Even non-export producers are hurt by stronger competition from imports made cheaper by the peso rise. We become less attractive to foreign visitors because they get less for the foreign money they bring in.

What is pushing the peso up? It’s mainly driven by the US dollar lately losing value against other major currencies like the euro and the Japanese yen. Meanwhile, while our dollar inflows have fallen with declining exports, our dollar outflows have fallen more with even steeper import declines. Thus, we’ve ended up with more foreign exchange supplies, thereby lowering its value and correspondingly raising that of the peso. Analysts are split on the outlook for the dollar, but many believe it will continue declining—and this would spell mostly bad news for us.

Alas, there are more bumps, but I had hoped to end on a positive note on emerging “green shoots” for our recovery. As we’re out of space, let’s push that to another article.

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