Crossroads: Toward Philippine economic and social progress
Philippine Star, 14 August 2019


Last week, the national income estimates for the first semester were released. The growth rate of output or GDP was 5.5 percent based on year-on-year estimates.

A lingering question for the whole year is whether the year’s growth target of around six percent for 2019 is achievable.

Under-performance. This was a disappointing result as the expectations were closer to six percent per year.

The foremost reason cited by NEDA for the lower growth rate was the delayed approval of the budget by the House. This forced the government to operate on the lower budget figures of the previous year.

Government budget data on actual capital outlays for the first semester this year was underspent by P101 billion as a result of the four-month budget delay.

The government, therefore, is flush with resources to finance the capital investment programs, as well as other new spending to support in the economy.

A second factor that was cited was the prohibition of government infrastructure spending during the election campaign period.

Even as this was the case, however, the election period often meant a surge in overall aggregate demand. Thus, campaign spending would have substituted effectively for any government underspending.

A structural factor that might have affected current economic performance were the inflationary problems that occurred in the previous year. Initially, the inflationary concerns of the year caused the Bangko Sentral to dampen credit with measures to raise the bank interest rate.

At the more basic level, the government undertook the adoption of structural policy reforms that removed NFA’s monopoly over rice imports and its new policy of a freer flow of rice imports under a tariff trade regime.

The inflation expectations of the previous year, therefore, were thus tamed even during a time of elections. This also enabled the Bangko Sentral to undertake defensive monetary policy along with other central banks to reduce the interest the bank rate.

There is another important factor that led to the reduced growth rate phenomenon. It is the most unsettling factor.

Uncertain climate for world trade and industry. The external economic conditions during this period have been worsening. They have brought a degree of uncertainty and caution in the world economy.

I refer to the US-China trade war. Uncertainty has reduced trade opportunities and has affected the growth of the international economy.

The changes that are happening are not bringing good news for the Philippines because we are not fully positioned to take advantage of the changing trade realignments, as other countries with strongly open policies to take advantage of the changes happening.

Some third countries have made major gains from these transfers of manufacturing sites. (See “Winners from the US-China Trade war,” this column, Philippine Star, July).

The US-China trade war has not stalled, but has become more dangerous as the stakes between the main protagonists have risen. Some weeks back, there were hopes the two countries were close to an agreement as the bilateral official talks resumed.

But they could not come to a satisfactory deal. The result was that President Trump raised the stakes by subjecting all imports from China to an additional 10 percent tariff. A corresponding Chinese response were undertaken to target its own imports from the US, mainly of agricultural farm products.

The economic pain for both participants is clear. US prices have risen as their imports from China have become more expensive from tariff increases on Chinese imports.

In the meantime, China’s domestic industries are suffering contraction to the extent that their exports to the US had fallen and domestic manufacturing investments in China have transfered to third countries.

But the general impact of the trade war is to create greater uncertainty for trade and investments in the world economy.

Germany, the engine of the EU’s growth over the decades, has been in an economic slump. The overall impact on the EU, the second most important bloc in the world economy, has been to slow down overall growth.

The Brexit problem in the United Kingdom has caused a recession in the UK economy. As the Brexit problem enters closure by October this year, the EU and the UK are locked in continued uncertainty. It could bring a downturn to both economies in the short run if Brexit happens.

That has ripple effects too on the world economy.

Philippine status as the world turns messy with a continuing trade war. In general, even with these uncertain world events, the Philippine economy continues to be on a fairly good swing. Its sovereign credit ratings remain sound.

There is nothing that is generally unsettling, since all engines of growth continue to function well for the economy. However, a lot of its economic relations with the world remains an open book.

What could harm it is any development that worsens the international economy from its rather uncertain directions of the moment.

We trade with all these countries and our investments are also part of the chain of world investments that link every country.

Philippine trade today is highly linked to China and East Asia, its BPO services to the US and its OFW incomes derived mostly from the rest of the world. The US is also a major trading partner.

What policy-makers need to do. Philippine policy makers need to get Congress to speed up the work on tax and investment reforms under the TRABAHO bills.

Effort must be made to pass impending priority bills to improve the climate for foreign direct investments through amendment of restrictive policies.

We have lost precious time in failing to cash in on the positive changes we could achieve in a changing world because our economic policies are not flexible enough. The country could make gains out of the current mess in the US-China trade war.