Crossroads (Toward Philippine economic and social progress)
Philippine Star, 19 December 2018


Inflation and further growth characterized the year’s economic progress. Though the inflation rate was by far more serious than anticipated, the economy continued its booming pace, making it still one of the highest performing in the East Asia region.

Inflation and growth. Inflation picked up early in the year over its modest phase in earlier years. The inflationary expectations were created by the rise in spending for public infrastructure along with usual growing demand.

Several bad coincidences contributed to the inflationary pressure. A rise in oil prices in world markets responded to uncertain events in the Middle East. At the same time, some natural calamities (typhoons) brought agricultural disruption, especially in Luzon. Mismanagement in buffer stocks of rice supplies during the heavy planting period assisted in creating unnecessary scarcities.
All these caused an increase in the rate of inflation. Anticipated at around three to four percent during the year, the inflation rate peaked at seven percent year-on-year by the third quarter.

The country’s real growth of output (or GDP) continued at little above six percent annual growth. The likelihood of reaching growth a little close to 6.5 percent annual growth by the end of the year is possible.

Holding back inflation. To hold back inflation, the monetary authority (Bangko Sentral, or BSP) embarked on a more aggressive stance by raising its policy rates. This helped to curtail unnecessary credit growth to temper private spending.

In addition, such measures assisted in preventing outflows of foreign portfolio investments to other countries. The hike in US interest rates initiated by the US Fed attracted the flow of capital back to the US.

The BSP, by November, had raised key interest rates to 4.75 percent from the three percent level at the beginning of the year. That move put inflation under some control. It helped that the rise in world oil prices reversed and returned to more modest levels

In the meantime, the inflation rate began to hold and showed some retreat, falling from seven to six percent. The measures adopted by the government to bring in imports of essential commodities helped in this. Notable among these was the liberalization of imports of rice by private sector.

The failure of NFA (National Food Authority) to make timely imports for buffer stock needs aggravated the inflation problem. This mismanagement of buffer stock calls to mind the need for a reform of import policy for part of the country’s rice needs.

Peso exchange rate. The peso exchange rate had been held at around P53 per US dollar through the year. The monetary actions have partly helped prevent further depreciation of the peso although mildly.

The pressure on the peso exchange rate comes from continued overall spending: fiscal efforts to sustain the BBB (Build Build Build) momentum, the rising need for imports to feed onto the country’s exports of manufactures (electronics, PEZA based raw material needs, and the country’s industrial needs for energy and other imports to fuel both production and consumption).

Balance of payments. The aggregate demand on imports grows ever larger as the economy grows. The trade balance appears to be widening, because exports have not grown as fast as imports. In September alone, imports exceeded exports of goods close to $4 billion.

The international balance of payments provides the full accounting of a country’s transactions with the world. For decades now, a feature of the balance of payments has been a wide trade imbalance in merchandise goods.

Against this deficiency in actual exports of goods, the Philippine balance of payments has been propped up by continued OFW remittances from work in other countries; by rising tourism revenues of foreigners in the country; and by the earnings of BPO (business process operation) companies that provide services to enterprises located in other countries.

As in the past, large opportunities are open toward creating more jobs in agriculture and industry that create more jobs at home. These jobs would eventually displace remittances through new dollar earnings through exports and efficient domestic industry.

A need to strengthen integration through trade of enterprises. A feature of the 2018 Philippine economy has been the lack of industrial capacity that integrates with the many industries that support the export sector in manufacturing. This has been a legacy of the protectionist domestic industrial policy of the past which discouraged the entry of large foreign direct investments into the country.

Most of the industrial capacity dedicated to exports have been located in the export processing zones. Locators in these zones have been mainly dependent foreign direct investments that secure their raw materials from imports.

Future industrial policy should be able to promote some amount of integration of enterprises located within the domestic economy with enterprises that also located in the export processing zones. The domestic industrial sector needs to be opened more toward foreign direct investments to enlarge the opportunities for integration of many companies already operating in the country.

Employment and underemployment. Continued economic growth over the years, including in 2018, has increased employment. Though more jobs are getting generated, the multiplication of “quality jobs” and not only jobs can only come about as industrial and economic deepening happens in the economy.

The Philippine Statistical Authority has put the latest unemployment rate at 5.1 percent, with underemployment at 13.3 percent on the basis of a labor participation rate of 60.6 percent.

Employment numbers are relatively good indications that employment growth has been happening at a good pace in the country.