Core
Business World, 24 January 2012
In late December last year, the Hongkong and Shanghai Banking Corp. (HSBC) downgraded its forecast for the Philippine economy for this year to 3.6% GDP growth, from an earlier outlook of 4.2%. The same report noted that the eurozone continued to slip into a recession and the US economy remained stagnant.
Now comes an optimistic outlook for the Philippine economy by 2050. The Philippines will grow to become the 16th largest economy in the world in 40 years, according to HSBC, in its report “The World in 2050.”
Strong economic fundamentals and powerful demographics could possibly accelerate our average gross domestic product (GDP) growth rate to 7% from the historical rate of less than 5%. The biggest source of uncertainty in the forecast is the assumption of strong economic growth in the next 40 years. How can the Philippines grow from a modest 3.6% GDP growth in 2012 to an average 8.4% in the next decade?
Specifically, HSBC projected our growth rate to average 8.4% from 2010 to 2020; 7.3% from 2020 to 2030; 6.6% from 2030 to 2040; and 5.8% from 2040 to 2050.
Short-term projections are easier and more reliable than long-term projections. The farther away the projected year from initial year, the bigger the margin of errors. Long-term projections are based on assumptions that may or may not take place.
But in making long-term projections, one cannot ignore short-term realities. After all, the long-term performance of any economy is determined largely by what its government does in the short-term.
Short-term realities
The European economic drama continues to unravel. Recession in the euro area is now a near certainty, and the only remaining uncertainty is when, its depth and its duration. The US economy continues to be hounded by high joblessness and persistent housing mess, with no permanent solutions in sight until after the November 2012 presidential elections. The economic recovery of Japan from its triple tragedy in the summer of 2011 remains delayed. And China is in the process of engineering a soft landing.
The harsh reality is that the world economic outlook has become even grimmer than what it was late last year. The Iran problem has added new wrinkles to the geopolitical trouble brought about the by Middle East and North African territories. Its impact could be much worse than its impact on global oil supply and oil prices.
It would be foolish to assume that the Philippine economy will be immune from these gloomy external developments. The negative impact of the worsening world economic reality has reached Philippine shores.
Merchandise exports are down this year — perhaps by as much as 5 to 6%. Overseas remittances, while they had remained positive last year, had been on a downward trajectory since 2005. Growth of OFW remittances may have slowed to 7% in 2011 (from a peak of 25% in 2005). BSP is forecasting a 5% growth in overseas remittances in 2012.
Strong exports recovery can easily be ruled out. With declining global trade, and with our major trading partners — Europe, US, and Japan — still on the ropes, exports are not expected to have a positive contribution to growth next year. Net trade — that is, exports less imports — is expected to be negative as usual.
Exports of labor are expected to grow modestly. Overseas remittances have been a major source of household consumption and until recently private investment. These will now be tempered depending on the peso exchange rate movement and consumer confidence of households receiving overseas remittances.
What counts is not the dollar value of remittances; rather, it is the peso value of remittances. A 5% growth in remittances accompanied by a 5% peso appreciation is a wash.
The shrinking peso value of overseas remittances is compounded by rising pessimism by households of overseas workers. Because of the rising uncertainty and job insecurity, they would tend to save more (consume less) and invest less in consumer durables and housing.
Business process outsourcing (BPO) will have modest growth. But there are serious downside risks. There are moves in the US for removing the incentives for BPO operations abroad. The clamor for these moves appear to be gaining bipartisan support. They are politically sound, though economically flawed. But under the presently charged environment, politics win over economics most of the time.
This leaves government spending for public infrastructure as the only strong source of growth for the Philippine economy. Last year was a dismal year for public infrastructure spending. It became, without a doubt, a drag on economic growth.
From P165 billion in 2010, the public infrastructure program was reduced to P145 billion, or by 20%. This means that under the best possible case, where the government was able to implement all authorized projects, the contribution of public infrastructure to economy growth would have been negative. Sadly, more than half of authorized projects were not implement. Not surprisingly, such failure to start and complete public infrastructure projects, contributed to the sharp drop in the contribution of public construction to economic growth.
This year, the public infrastructure program was increased to P182.2 billion, or by 25.5% increase. Nice, but the sum is a measly 1.8% of a P10-trillion economy.
Here are the other disturbing facts. First, construction represents about 10% of total economic output, with one-fifth (20%) contributed by public construction, and four-fifths (or 80%) contributed by private construction. Public construction has started to shrink during the second half of 2010 and the first three quarters of 2011.
Private construction started to contract during the second semester of 2011. The heavily weighted private construction might show continuing weakness as a result of past building boom and slowing demand for housing and office spaces in response to the slowing world and domestic economy.
So what happens if construction continues to weaken? Assuming that the revealed weakness in private construction persists, but the government rediscovers efficiency and effectiveness and then was able to disburse the P200 billion or so public infrastructure budget, what would be the impact of construction on the P10-trillion economy? Still negative, unfortunately. A falling private construction could dominate public construction.
The public-private sector initiatives are still one to two years away from making any significant contribution to economic growth The selection, bidding, and award of projects are bogged down in the bureaucratic labyrinth.
Growth in 2012 economic output hinges on the successful implementation of the modest public infrastructure program. But even then public infrastructure would have limited contribution to economic growth. While a strong public construction performance matters, the limited size of the resources allocated to public construction can’t increase GDP growth spectacularly.
There is hope, but…
The short-term economic outlook is bleak, but I’m not saying that the Philippines does not have a chance to attain the optimistic scenario painted in HSBC report, “The World in 2050.”
There is hope, but only if our leaders do the right things. And it has to start now. During the next few years, while the world economy is going through a period of adjustment, our leaders should focus on rebuilding the country’s crumbling infrastructure and on strengthening its weak public institutions so that the Philippines will be stronger, nimbler and more competitive when world economic growth is restored.
Today, our leaders have to design and implement a strong economic reform program. But such program requires strong leadership, a clear road map, an effective and competent government, leaders who will work for the welfare of the majority of the people rather than their own, and a credible and effective legal system and regulatory framework.
