Core
Business World, 3 June 2014
The weaker-than-expected first-quarter GDP growth of 5.7% disappointed a lot of people. It is significantly lower than the official government forecast of 6.5% to 7.5% and the consensus private sector forecast of 6.3%. Government authorities were quick to blame super typhoon Yolanda as the culprit of the economic slowdown. Seriously?
In the first place, Yolanda happened seven months ago, hence its impact on the economy should have been reflected in the fourth quarter last year. In the second place, it mostly affected Eastern Visayas, whose contribution to the entire economy is a measly 2.6%. Even Bangko Sentral ng Pilipinas (BSP) economists said the impact of the typhoon was “contained” weeks after the catastrophe.
There are more plausible reasons for the slowdown. First is base effects. The unusually high consumer, investor and government spending last year may be due to national and local elections. The absence of elections this year naturally meant lower overall spending. Elections have a way of stimulating the economy in the Philippines. In recent years, GDP growth peaked in 2004, 2007, 2010 and 2013 — all election years.
The second plausible explanation is the deficient and unreliable power supply. Manufacturing, tourism, retail activities and, to a limited extent, agriculture are all adversely affected by power failures.
The third reason is the significant slowdown in construction. It inched up to just 0.9% from a phenomenal growth of 31.1% in the first quarter last year. Surprisingly, private construction, which is more than three-fourths of the total sector, shrank by 6%.
Public construction grew 22.3% in the first quarter this year. But its growth in the succeeding quarters will be limited by what Congress has authorized the Executive Department to spend.
Fortunately for this year, the proposed infrastructure budget for the whole government (national, local and corporate) is 32.7% higher — P411.6 billion, up from P310.2 billion last year. The questions now are: How much of the total infrastructure budget would the administration be able to spend? Has there been an improvement in its implementation capability?
So what’s a reasonable forecast for the second quarter and full year GDP growth? Well, was there any significant change in the economy since the first quarter? None. Farming has not been restored in many of the typhoon-devastated areas. The reconstruction effort has remained sluggish. A great majority of the typhoon victims still live in tents.
The power situation has not changed, and it could possibly have worsened with the drought brought about by El Niño. New power supply capacities won’t come in until next year at the earliest. More realistically, power supply will normalize only in early 2017. So the insufficient and unreliable supply of power is going to hobble economic expansion.
Since the second quarter (April to June) is two-thirds done, I expect second-quarter GDP growth to be either equal to, or slightly lower than, the first-quarter GDP growth. The expectation that exports will soar because of a stronger US economy is false optimism; the US economy has shown signs of weakening.
Overall, the official full-year growth forecast of 6.5% to 7.5% is optimistic. A more realistic one is 6% or even slightly lower.
What needs to be done? On the fiscal side, the administration should remain focused on spending on public infrastructure of all types — large and small, urban and rural, capital-intensive and labor-intensive. Investing in productivity-enhancing public infrastructure has high payoffs in the long run, and can potentially create a lot jobs in the short run.
The Executive Department is constrained by what is provided for in the national budget, hence it should strive to progressively relax the binding constraint by increasing the allocation for public infrastructure in future budgets. Having a supplemental budget this year is desirable, but it’s too late. A new budget will be submitted to Congress in less than two months.
Public construction should be done in all 16 regions to make growth truly inclusive and in order to decongest Metro Manila. Yet, nine of the 10 recently National Economic and Development Authority (NEDA)-approved infrastructure projects are in Luzon. The bias in favor of Luzon has not escaped the eyes of Filipinos from the Visayas and Mindanao.
Public construction is less than one-fourth of total construction, and on its own cannot move the economy markedly. Thus, the Aquino administration should realize that publicly funded infrastructure has to be complemented by private sector investment.
Private construction should continue to be robust in succeeding quarters. Bureaucratic red tape on new construction should be reduced if not totally removed.
On the monetary side, the BSP should rethink its pivot towards a tighter monetary policy. Otherwise, it runs the risk of nipping the strong economic recovery in the bud. Credit expansion for agriculture and power supply should be encouraged.
The BSP should also continue to make the peso competitive, with a slight weakening bias. This policy would protect the purchasing power of families of Filipino overseas workers. It could also provide a natural protection for import-substituting industries.
