Business World, 14 August 2012


As the saying goes: when it rains, it pours. As a consequence of the monsoon rains and floods, and three discouraging economic news, the first-quarter gross domestic product (GDP) growth of 6.4% has been virtually washed away. What remains is an economy that is facing a deflated growth prospect.

Not that international financial organizations and reputable forecasting firms supported the government’s line that the better-than-expected economic growth in the first quarter is sustainable. On the contrary, there is near unanimity among them that economic growth in the second half of 2012 will be slower than the first half.

The effect of the torrential rains and floods was less deadly compared to Ondoy, that deadly and destructive September 2009 storm. But the damage in terms of loss of properties, public infrastructure, agricultural production and other business activities could even surpass that of Ondoy.

The rains and floods affected roughly two-thirds of the economy. They affected the National Capital Region which accounts for about 35.7% of the country’s economic output. Also affected were the Ilocos (which accounts for 3.2%), Central Luzon (9.3%), Calabarzon (17.4%), and Mimaropa (1.8%) regions. Each region sustained varying degrees of damage, some more than others.

The towns that ring Laguna de Bay will continue to be underwater for several weeks a result of many years of siltation and neglect. It will take many weeks before farms can be prepared for planting and made productive once more.

While repairs and reconstruction of roads and bridges should start immediately to ensure safety and ease of travel, they are likely to be delayed because many areas (in Bulacan, Pampanga, Laguna, Kamanava and others) remain underwater.

For a consumer-led economy, a significant impact of the monsoon rains and floods is on consumer spending. Victims of this calamity have lost in terms of properties. How can they bounce back? Many of them have yet to recover from Ondoy/Pepeng and Pedring (2011).

Do victims of the most recent calamity have savings from which they can draw upon to rebuild? If not, do they have access to funds of the Government Service Insurance System, Social Security System, and Pag-IBIG? Or have they borrowed before and hence ineligible to borrow this time?

In any event, the impact of the September rains and floods on consumer spending, primarily through wealth effect, is negative. And it can be substantial.

The second bit of bad news is the slow Philippine exports.It’s back to reality. The initial euphoria brought about by a 19.7% increase in exports in May has been dashed back to more realistic level with a lethargic exports growth of 4.2% in June.

Year-to-date, exports grew by 7.7%, much less than the original target of 12% (based on the Budget of Expenditures and Sources of Financing 2012), but recently revised to 10% (based on the BESF 2013). But since exports had shrunk by 6.9% in 2011, the 7.7% growth in the first half of the year is hardly an improvement. And a strong surge in exports in the second half of the year is not in the cards.

Electronics exports which use to account for two-thirds of Philippine exports continued to struggle. For the first half of the year, it contracted by 6.9%. I have taken the position that the slowdown in electronics exports is a function of slower global growth and is structural at the same time. For the latter, maybe the Philippines is not exporting goods that are attuned to what the world buys (Apple and Samsung products, for example).

Looking at the big picture, exports has increasingly become a small contributor to Philippine growth. Falling exports should be offset by increased manufacturing for the domestic market. But this is easier said than done given the continuing appreciation of the peso. It is cheaper to import than manufacture goods for the domestic market; at the same time, it is more difficult to export as the peso appreciates in value.

The second negative sign is the weak growth of farm output in the first six months of 2012. The Department of Agriculture announced that farm output grew by 0.93% with a gross value of P691.4 billion at current prices. This is in sharp contrast to the government’s full-year growth target of 3-5% in real terms.

Farm output in the second quarter grew at 0.73%, slower that the 1.08% growth of the sector in the first quarter. It contracted 2.32% compared to the same period in 2011.

With the destructive and lingering effects of three successive weather events — two typhoons, monsoon rains and floods in July and August — the government’s growth target now appears implausible. But Agriculture Secretary Proceso Alcala seems unperturbed.

The third discouraging news is the failure of the Philippine government to attract foreign direct investments (FDIs) to the country. The central bank reported that FDIs for the first five months of 2012 posted a 10.2% increase to reach $844 million, a turnaround from the 14.8% fall recorded in January to May 2011.

That’s the positive spin. The reality is that the January-May level looks alright because last year’s FDI contracted from the year before; for the full year, FDI contracted by 14.8%.

The other harsh reality is that the Philippines has remained a laggard as far as attracting FDIs compared to its ASEAN-5 counterparts is concerned. Strong FDI inflows could contribute significantly to efforts to achieve strong, sustained and inclusive growth, and eventually catch up with its ASEAN-5 neighbors. But after two years of the Aquino administration, FDI inflows into the country remained paltry.

FDI inflows to the Philippines registered nearly $3 billion a few years ago. This year, while FDIs to the Philippines have yet to reach the billion-dollar mark, those to Indonesia have already reached over $5 billion in the first quarter alone. From January to May 2012, Vietnam has attracted $5.3 billion.

What this state of affairs suggests is that much remains to be done to make the Philippines attractive to FDIs. The government has to address poor and crumbling infrastructure, reduce power costs, increase the credibility of contracts, and streamline the tedious process of setting up a business in the country.

Overall, the horrendous and potentially recurring monsoon rains and floods have just made the tasks of economic recovery, nation-building, and people’s welfare improvement more serious, more difficult, and more urgent.