Crossroads (Toward Philippine economic and social progress)
Philippine Star, 13 July 2016


What can we expect to be the macroeconomic path of the Duterte administration?

Useful hints can be pieced together from recent developments. It is possible to deduce what’s next to come, what consequences these programs could bring on key macroeconomic numbers (prices, exchange rate, debts and balances) and what uncertainties remain.

Hints from the Eight-Point Economic Program and the warm bodies in the Cabinet. The key economic managers chosen by the new President come from highly qualified quarters. Together, these managers will oversee and guard the macroeconomic performance of the Philippine economy.

Three critical government departments, namely, Finance (under Carlos Dominguez, a businessman with experience in government), NEDA (Ernesto Pernia, economist) and Budget (Benjamin Diokno, economist, formerly undersecretary of Budget) will work with the central bank (under BSP Governor Amando Tetangco), who is serving a separate term of appointment.

Aside from their individual, powerful economic mandates as heads of economic institutions, they compose the important Budget Development Committee of the government which sets macroeconomic targets and plans.

These managers will help reconcile the various claims of government agencies and departments with the help and consent of Congress. Guiding their expenses are programs that are supported under the eight point plan proposed by the administration.

The President, guided by the work of his key managers, will help reconcile the limits of resources which are determined by the balance of payments, by fiscal capacity and by monetary feasibility.

Duterte inherits sound macro-fundamentals.  The Duterte administration inherits sound macro-fundamentals from the previous Aquino administration. This achievement has also led toward good marks in terms of “investment grade” credit rating.

During the six years of the Aquino presidency, the country’s fiscal, balance of payments and monetary sectors operated under less stressful conditions. This was achieved because of strong balance of payments position brought about by steady growth of exports of goods and services as well as the continued inflow of OFW remittances, the product of early economic reforms.

This also arose from a tight management of the fiscal sector that the government undertook. The tax-to-GDP ratio rose to 13.6 percent from 12 percent during the Aquino presidency, a situation that led to the increase in spending on social services, notably education, health and social services.

The fiscal discipline led to a relative fall of total debt to the GDP ratio. In 2010, the debt to GDP ratio was 52 percent, just a little about half of the GDP. By 2015, total debt was 45 percent of the GDP. This fall by seven percentage points was a significant reduction of total debt, some of which was achieved through the retirement of some external debt.

The reduction of the fiscal deficit during the Aquino presidency demonstrates these developments. When it took over the government, the deficit was at 3.5 percent of GDP. By 2015, the fiscal deficit was 0.9 percent of GDP.

But Duterte also inherits Aquino’s poor performance in public infrastructure investment.  The fiscal deficit as a percent of GDP provides another view of this picture. When the Aquino administration took office in 2010, the budget deficit was 3.5 percent of GDP.  By the time it was leaving office, the same number was 0.9 percent of GDP.

(Comparative figures in 2015 in other countries in East Asia tell a different story. Thailand’s was 2.5 percent of GDP; Indonesia, 2.5 percent, Malaysia, 3.2 percent; South Korea three percent, and even Singapore and Hong Kong had deficits amounting to 1.5 percent of GDP.)

The prudential effort to achieve good-looking macro-ratios for the economy on the part of the Aquino government had masked a poor accomplishment in public infrastructure.

The obsessive tightening of public spending was matched by poor appreciation of critical measures that could have perked up economic investments. Aquino’s stance against liberalizing the amendment of the constitutional restrictions on foreign direct investments further constricted its accomplishments in raising the investment rates in the economy.

Philippine total investment was 20.8 percent of GDP in 2015. But the ASEAN-Big5 countries had an average investment rate of 28.3 percent of GDP. Philippine investment rate pulled down the average ASEAN investment rate as a percent of GDP.

These were the relevant investment-to-GDP ratios in 2015 by countries: Thailand, 24 percent; Malaysia, 25 percent; Indonesia, 34 percent; and Vietnam, 27.6 percent.

President Duterte’s macroeconomics challenge: bigger expenditure.  The rise of President Rodrigo Duterte is likely to change the speed with which public investment decisions will be made.

There are many signs this will happen: First, the eight-point economic roadmap as highlighted by the newly appointed economic managers is tantamount to an announcement of accelerated programs of government.

There is a stepped-up infrastructure investment plan. Some of these are designed to remove the traffic/ transport mess choking Metro-Manila. Some are intended to encourage the transfer of investment directions to other growth centers.

Then, there are new demands that could arise as a result of the war on drugs, criminality and corruption. Such spending would represent spillovers of new expenditures in public health and other social programs.

Most important is the expected rise of investments designed to fill in the backlog in infrastructure. As expected in present plans, most of the infrastructure investments will be through the public-private partnerships.

Prices, the peso, debt, and finance.  During the six years of the Aquino presidency, prices and the peso exchange rate remained basically stable. This happened also during a period when world interest rates were at their lowest.

However, the country missed its opportunity when the financing of major investments in infrastructure did not push through and much increase in economic capacity was forgone.

In the prospective future with the Duterte government, higher levels of investment spending could lead to some price inflation, peso exchange rate adjustments and public and private debts to rise. The task of responsible economic management is to moderate such pressures, if not neutralize them.

The trade-off from this extra volatility is that the economy will strengthen its capacity to create more solid economic growth because investments will be there to fortify the country’s productive capacity.