Crossroads (Toward Philippine economic and and social progress)
Philippine Star, 23 November 2016


A year-on-year growth rate of 7.1 percent for the third quarter of 2016 assures the Philippine economy is on a high growth path. This, however, is happening during a time when adverse short term developments are enveloping the economy.

The question then is whether the high growth rates targeted in the near future are still in play. Though the external climate is getting more complex for the world as well as for the Philippine economy, there are strong domestic factors that continue to favor sustaining a high growth rate in the next few years.

Changing macro picture? Recently, the stock market has been battered badly by net fund outflows from portfolio investors. The last close of the PSE index was just under 7,000 (actually, 6,979 on Nov. 21) from its peak of 8,127 (sometime in August).

Such net investment fund outflows have contributed to the drop in the value of the peso. The peso has now depreciated to a level almost close to P49.95 to the dollar (Nov. 21), representing a 7.8-percent decline from P46.32 to the dollar in Aug. 21.

These are large fluctuations. Stock market values get influenced by short term factors more easily. In similar ways, exchange rates can be influenced heavily by short term factors and are susceptible to speculative influences.

Of course, the movements of the stock market are only an indicator of investor sentiment and does not represent the real economy.

The main driver for the fluctuations in capital market values is the long awaited US Federal Reserve action to raise interest rates in the United States. With high employment rates achieved in the US through its economic recovery, the Fed now wants to normalize its monetary policy and move away from the regime of almost zero interest rate during the economic recession.

Such action has been seen as a guide for rising interest rates in the world and has a major impact also on exchange rates.

The volatility of the movements in the Philippine bourse and in the peso exchange rate has also been affected by the Trump election factor, with its promise to reverse US policies on free trade.

It is difficult to attribute exactly how much of the large fluctuations were also caused by the remarks made by President Duterte on sensitive economic and foreign policy issues as he stressed changes regarding an independent foreign policy when he visited China and on other occasions.

The incautious remarks of the President might have helped to trigger shifts in investment decision-makers. Among other Asian neighbors buffeted by the same external factors, it is the Philippines that has experienced higher levels of volatility.

Guarded optimism in favor of high growth. In spite of the observed instabilities, there are push factors at home that continue to favor strong growth as targeted.

Firstly, the government is doing the right thing on economic development reforms. The reforms to open the economy to more foreign direct investments are part of the program for amending the constitutional provisions. This is helped further by moves that are designed to restore peace and order through negotiations with both the NPA communist insurgency and the domestic Muslim rebellion in Mindanao.

Moreover, despite the shock effects of some announcements about changes in foreign policy, the government is also quick to make corrections for perceived misapprehensions.

The government is committed toward actions to speed up infrastructure investments, even as the economy’s consumption level is rising. The construction boom is further buttressed by the infrastructure investment activities being implemented. Aggregate spending is rising and part of this is designed to raise investments.

Finally, the macro fundamentals are still sound. High OFW remittances, the BPO industries and some export industries continue to strengthen the balance of payments. The country’s low net debt position is highly sustainable. In short, there is still a strong macro-fundamental position.

Two essential economic reforms will immeasurably support the growth objective and make it self-sustaining.

Tax reform package. The passage of the tax reform proposals will produce the fiscal revenues needed to finance the ambitious government spending program. A huge part of this spending is devoted to the construction of various public infrastructure facilities for the country. It is designed to raise the public investment toward the five percent of GDP in the interim period.

In general, the net impact of the reforms as proposed would not render them more geared toward a more equitable tax system. Yet a conscious allocation of tax burdens and of targeted subsidies for some citizens. Especially the poor, is in place to reduce the inequities of burdens among taxpayers and citizens.

(The government’s tax reform program was the subject of my recent columns of Sept. 21 and 28.)

BOI incentives and industrialization. Critical to a rise in manufacturing is a revision of BOI policies, or simply a more liberal treatment of foreign direct investments in a general investment incentives regulation. For years, the Board of Investment (BOI) – the country’s principal agency for incentivizing new investments – has served as the home of highly protectionist industrial promotion regulation.

Most of the investment incentives have been configured on the basis of a highly restrictive joint venture requirement prior to availment of investment permits, with the exception of innovative pioneer investments.

It seems the opening to China’s investments will accelerate an improvement of the foreign investment incentives regime by bringing in new changes in BOI policies. Many of the new investments anticipated from China will involve contradictions to long held policies about FDI participation in the domestic economy. A number of large industrial projects being planned by the Chinese are designed to serve domestic industry.

This is a good development. It will open up the domestic sector more to foreign direct investments. Here, the liberalization of the investment climate is stimulated by the direct efforts of the President to invite Chinese investments.

But the rules of investments would eventually be extended to all foreign direct investments if they are to be of general application. And domestic industrial manufacturing will rise again.