Business World, 9 July 2013


Why can’t business editors and reporters write about more noteworthy and analytical articles? They write and fret about small, unimportant things, and totally miss the big picture. For example, why don’t they write about the reasons for, and consequences of, implementation delays of transport projects? Why don’t they write about huge economic losses due to project delays? Why don’t they write about the impact of a strong peso on workers in affected sectors, say the OFWs or the furniture business in Cebu?

Project delays are extremely costly. A recent study by the Japan International Cooperation Agency (JICA)estimated that the daily economic losses due to the perennial traffic congestion in Metro Manila at 2.4 billion and rising. In 2012 alone, the 2.4 billion daily losses would total 876 billion annual losses or approximately 8.3 percent of the 10.6 trillion GDP. Multiply this by three, the first half of Mr. Aquino’s term, and one gets the enormous losses due to policy delays, neglect and inaction.

The economy needs some 600 MW of new power source to support the Aquino administration’s dream of strong, sustained and inclusive growth. The construction of power plants needs a lead time of between four to seven years, depending on energy source (coal, hydro, geothermal). At the rate new power plants are rising, frequent power outrages now appear imminent in the final years of the present administration.

The more important and game-changing economic news are being missed. The focus of economic reporting has been on inflation, gross international reserves (GIRs), and the weakening peso.

No doubt, these are important economic variables in the past, say during the years right after the Asian financial crisis. But not anymore or at least not in the next few quarters.

For example, last week economic reporters made a big deal about the increase in headline inflation rate — from 2.6% in May to 2.8% in June — as if the monthly uptick is of major significance.

It’s not. We’re fine. Inflation in the first half of the year was 2.9%, much lower than the first quarter average inflation rate, and slightly lower than the Bangko Sentral’s 3-5% inflation target.

Even the core inflation — that is, inflation excluding the usually volatile food and oil prices — settled at 2.9%, slightly lower than the 3% in May, and much lower than the first quarter core inflation average.

With a bit of struggle, business reporters and analysts explained the uptick in inflation. They cited the weakening peso, the higher oil prices in the world market, and the seasonal higher demand for school supplies. What a waste of ink and space.

Barring any major calamities or unforeseen events, I can predict with confidence that inflation will remain tame up to the end of next year. June’s inflation rate is below the inflation target, which means rising prices should be the least of policymakers’ worry. Inflation rates have to average 7.1% in the second half of the year, before the upper bound of 5% is reached. And 7.1% inflation rate is highly unlikely.

Next, the business reporters write about the lower gross international reserves (GIR)in a worrisome way. GIRs sunk to its the lowest level in ten months — now down to $81.6 billion. Scary? The way it was written, it was as if heaven will fall. No it won’t. We’re just fine.

The $81.6 billion — thanks to the constant flow of remittances from overseas Filipino workers (OFWs)– is more than what the economy needs to service its foreign debt and pay for its import’s requirements.

The rule of thumb is that the economy should have GIRs equivalent to three months of imports requirements. The $81.6 billion is three times more than what the economy needs. The GIRs remain hefty. And with a steady inflow of OFW remittances, there’s practically no risk that it will be depleted in the near- and medium-term.

Next, business reporters make a big deal about the weakening peso.

On Monday, the peso closed at $1=43.75. Quite frankly, I don’t see the weak peso as a threat. On the contrary, I’m happy where the peso is right now. A weaker peso is good for the Philippine economy. It’s good for the families of the OFWs, the exporters, the workers and owners of the Business Process Outsourcing firms, and workers in import-substituting industries.

It may even be good for the government. While the cost of servicing its foreign debt might increase since it needs more pesos to service its dollar debt, it might be more than offset by higher revenue collection by the Bureau of Customs. A weak peso means the peso value of imports will increase, and all things equal, it means higher BoC collections.

The Bangko Sentral governor should be happy too. A weaker peso may be the answer to BSP’s ballooning deficit.

Business editors and reporters should worry about the big picture: low foreign direct investments (FDIs), serious underspending in public infrastructure, and the mounting losses due to the debilitating traffic congestion in Metro Manila.

Why isn’t the Philippines attracting foreign direct investments? Last year, the Philippines attracted $2.8 billion. But that’s too low compared to what our ASEAN-6 neighbors received.

Singapore attracted the biggest chunk of $56.7 billion, followed by Indonesia with $19.9 billion, Malaysia with $10 billion, Thailand, with $8.6 billion, and Vietnam with $8.3 billion. Yet, Indonesia and Vietnam are not even investment-grade countries.

The Philippines continues to be the region’s FDI laggard. Net FDI inflows for the first quarter of 2013 reached $1.3 billion, 8.5% lower than the net inflows of $1.4 billion recorded in the same period of 2012.

Business editors and reporters should worry about the low level of public infrastructure spending. Halfway through this term, President Aquino continues to under-invest in public infrastructure.

The Department of Budget and Management (DBM)boasted recently that its infrastructure spending has increased for the first five months of 2013 — to 104.6 billion or an increase of 35.7% over the same period in 2012. This is supposed to be equivalent to 2.6% of GDP.

DBM’s numbers are not even accurate. Business editors should have verified that the reported 104.6 billion infrastructure spending is bloated. It included “other capital outlays” which could mean cars, tables and chairs, computers, military equipment such as guns, boats, and so on.

Correctly defined, “public infrastructure” means roads and bridges, flood control/seawalls, national buildings, water supply, airports/navigational facilities, ports and lighthouses, school buildings, farm-to-market roads, irrigation and so on. In brief, it means those capital investments made by government that would increase the productive capacity of the economy.

The 104.6 billion for “infrastructure and other capital outlays” is only 2.28% of GDP — not 2.6% as claimed by DBM. Moreover, it is less than half of the “ideal” level of public infrastructure, about 5% of GDP, as proposed by many economists and international funding agencies.

What is the best way to describe Mr. Aquino’s first three years as president? Answer: He has under-budgeted, under-spent, and failed to move much-needed public infrastructure projects. These government failures explain, to a large extent, why the economy has not created enough decent jobs and why a lot of poor people were left behind in the growth process.