What the country really needs

Talk to the pundits and commentators and hear their lamentations over the sluggish fourth quarter GDP growth figures of last year. Talk to the investment analysts and you hear a very different story.

Having used up much column space last year predicting an inevitable slowdown of the growth rate, and seeing it materialize, I find it useless to now cry over spilt milk. The government will try to paint a rosy picture, seeing the glass as half-full to counter the reasonable level of criticism it has to cop for tripping over itself. But as someone whose warnings and predictions came true, I would rather focus on the future, not the past.

The reason why analysts seem quite bullish over the country’s prospects is that they see the pipeline of projects that are either underway or about to flow through. It has taken about a year and a half to lay the groundwork, but the government has finally regained its footing. Forget about the invisible hand, last year it was the government’s usually visible boot that failed to leave an imprint.

If government was primarily the cause for the deceleration in growth last year as the external environment gradually deteriorated, this year external factors will pull growth down as both fiscal and monetary policy seek to restore it to its normal trajectory. If uncertainty persists in the EU, if President Obama gets his wish and the US Congress enacts laws to limit outsourcing, if the situation in the Middle East particularly in Iran continues to boil over, it could deflate the economy and counteract many of the measures government puts in place to invigorate it.

Despite all these what ifs there is still much reason to be buoyant if you are an analyst comparing the Philippines with other potential investment sites. The impeachment trial is a mere distraction from their point of view. Regardless of whether the prosecution or defence wins the case, it will not have a shred of influence over the current spend program. That is the good news. As far as the domestic economy is concerned, there should be a decoupling of political and economic events.

Portfolio foreign investments are sure to flow through the local bond market as the major players in the Phisix are set to corner different contracts under the public-private partnership program. They will thus have to raise capital as they breach their single borrower limits with the banks that they control. Forget about foreign direct investments, this is FDI by stealth.

As the government shifts the external debt obligations from the public to the private sector, the question now is whether it will have the fiscal fortitude to use the inflow of foreign currency in a more productive manner than just parking it with US treasury at near zero interest rates.

A more impactful use of these reserves would be to complement physical infrastructure investments by the private sector with economic and social infrastructure investments in education, health and housing. What the country needs is to plug the deficits in these areas of government spending.

But that is merely the first step. The next one would be to fund and implement the completion of the land reform program and to make agriculture and pockets of industry resilient to the global downturn and the emerging global business environment over the coming years. To do the latter, the government will have to roll-out a package of tax incentives and subsidies to boost productivity and encourage investment in capacity.

Of course there is nothing particularly new or fresh to this agenda. The extent to which governments become distracted or side-tracked from it by internal and external events, man-made or natural, self-inflicted or otherwise, determine to a great extent how successful they become in building prosperity and opportunity for all.

So perhaps in this year of the water dragon, the government could focus on letting the money flow so that our country gets what it needs and raises its clout as one of Asia’s newer economic dragons.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • J_ag ,

    I am a little confused by your post. You do not seem to draw the line between what analysts for the financial markets  are saying from what economic analysts are saying about the Philippine economy. 

    You are also confused about single borrowers limits which are rules for commercial banks but are not rules for investment banks  who serve as intermediaries for the bond markets for private and sovereign borrowers. 

    Please note that the BSP manages the forex rate precisely as part of their inflation targeting policy. They are in fact the dollar buyer of last resort when huge inflows of dollars come in due to the liberalization of the capital accounts which flow to the bond markets for the private and public sector. Fund flows enter both the bond markets and the equity markets. 

    So with the Fed forecasting a zero interest rate policy till 2014 and weak and tepid growth in Japan, EU and the US the search for higher yield will create both problems and opportunities for the country. What is certain is the debt stock of the country for both private and public sectors will rise as interest rates are down. Leverage will rise. 

    For a country with very little productive capacities to serve as vehicles assets will inflate. The next two years will be a good time to sell real estate assets into this bull market for financial 
     assets. The PSE will top 5,000 this year. It is going to be a good year for financial assets in the Philippines.