Business World, 21 October 2014


The Philippine economy is without doubt losing steam. The three major international institutions — the International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB) — have cut downward their economic forecasts for the Philippines in 2014 and 2015.

Significantly, their original forecasts were lower than the government’s official forecast. Yet, the country’s economic managers have stubbornly stuck to their original “rosy” forecasts.

What’s the implication of slower growth? Even with above normal economic growth in 2012 (6.8%) and 2013 (7.2%), unemployment and poverty incidence remained high. One in three Filipino workers is either unemployed or underemployed. Based on official government numbers, one in four Filipinos is poor; but poor is defined to mean having daily income of P51.88 or less per person per day.

But using the Social Weather Stations survey data, more than one in two Filipinos are poor, a social indicator that appears to be a more accurate measure of the state of poverty in the Philippines.

A weaker growth will mean that the government will be more hard pressed to address joblessness, poverty and hunger.

The harsh reality is that the economic numbers do not support the optimism by economic managers that the economy will grow 6.5% to 7.5% this year and 7% to 8% in 2015. Here are some of the reasons why. The strong agricultural output of 3.6% in the second quarter of 2014 is an outlier. It cannot be sustained in the second half of the year. In past years, agriculture grew by an average rate of 1.6%.

Construction has screeched to a halt in the first half of 2014. Public construction plummeted by 12.9% in the second quarter of 2014, from an impressive 32.4% growth in 2012 and 14.9% growth in 2013. The expansion of total construction was flat in the first quarter of 2014 and 1.4% in the second half of 2014.

While manufacturing has been a bright spot, growing at 8.9% in the first half of 2014, continuing expansion at this rate is not guaranteed. It would depend on strong global recovery and the sector’s ability to respond to the sputtering energy supply.

The three international organizations have identified exports as a strong source of growth. Exports grew 14.2% in the first quarter and 10.3% in the second quarter of 2014. But much of such growth is largely due to base effects. On a full-year basis, exports shrunk 1.1% in 2013.

The optimism that exports will continue to expand in the second half of the year is based on the expectation of a strong rebound in advanced economies and China. But such expectation is not forthcoming: the world economic recovery remains fragile and the Chinese economy has shown signs of slowing down.

The Asian Development Bank in its recent update of the Asian Development Outlook (ADO) said that there remains a lot of “pressing national challenges.”

“The most pressing national challenges are to improve infrastructure, attract more investment to generate better jobs, and further reduce poverty, which is at 24.9% in the first half of last year, down three percentage points from the same period in 2012,” the ADO said.

The Philippines has the poorest public infrastructure among ASEAN-5 economies. In recent years, it has not spent more than 2.0% of GDP for hard public infrastructure. Realistically, its crumbling infrastructure is incompatible with an economy that is supposed to grow at more than 6%. Traffic congestion is getting worse. The MRT, one of its urban transit systems, could break down anytime soon because of poor maintenance.

The Philippines has a lot of catching up do. If it wants to grow at 7% to 8%, it has to invest the equivalent of more than 5% of its GDP for hard public infrastructure.

The high cost of energy and its unreliability are binding constraints to faster, sustained growth. The existing regulatory framework has to be revisited. The government has to streamline procedures in order to cut bureaucratic delays and reduce the huge hidden costs in setting up power plants and in distributing power to firms and households. Such a move is good for investors and consumers alike.

The continuation of the present regulatory framework and bureaucratic delays will mean that Philippine firms will remain uncompetitive in the world market, and that Filipino consumers will continue to pay an exorbitant fee for their electricity consumption.

The world economic outlook is dimming. The recent economic downgrades by the three major international financial institutions have not taken into account the full impact of the Russia-Ukraine conflict, the ISIS strong military offensive in the Middle East and the specter of Ebola in Africa.

What appears as a positive sign — the sharp fall in oil prices — should be seen as yet another indicator that the global economy is slowing. From a general equilibrium perspective, lower oil prices is bad for investment in alternative sources of energy, such as solar and wind energy.

In hindsight, the move of Philippine monetary authorities to raise interest rates aggressively during the first half of the year may have been premature. This is because of the government’s inappropriate fiscal response. Instead of accelerating public spending to offset the tighter monetary policy, it decelerated.

Government final consumption expenditures inched up 1.9% in the first quarter and was flat in the second quarter of 2014. Public construction plunged by 12.9% in the second quarter of 2014.

This uncoordinated policy action should be blamed more on the Executive Department rather than on monetary authorities.

The risk of an economic slowdown is real and rising. This is not the time for the Aquino III administration to sit idly by, relax, and assume that all’s well.

Keeping GDP growth targets unchanged in the light of recent gloomy signs suggests an economic team that is in denial. I don’t know what the economic managers seek to achieve by denying the obvious. For Filipinos who have become increasingly skeptical of their leaders’ ability to run the government well, this is unacceptable behavior.