austerity

The Philippine Growth Spurt: will it last?

Image credit: NSCB.gov.ph

The latest release of GDP growth figures showed an upward growth spurt for the country. From a growth of 6.8 per cent for 2012 (revised up from initial estimates) to an unexpected year-on-year growth of 7.8 per cent in the first quarter of 2013, the numbers seem to provide both a strong signal to the world that the country now is back in business and a platform for the government to claim that its policy of pursuing clean, honest governance is paying off.

Having outpaced the growth of countries like China (7.7 per cent), Indonesia (6 per cent), Thailand (5.3 per cent) and Vietnam (4.9 per cent), and having done so on the back of an expansion of manufacturing and construction, has led some commentators to claim that the country has turned a corner or reached a “tipping point” from where it would now be on solid footing on a higher growth path.

There are only three things to point out here.

The first is the blindingly obvious: one quarter’s performance does not make up a trend. We cannot make any projections regarding future prospects based on this single observation. I would argue, not even the performance of the last 18 months proves anything. Remember 1997 when we thought we were about to take off? For those who were old enough to recall, remember what happened next? The same thing can be said of today’s situation.

Second is for us not to downplay the effect of the recently concluded elections. Malacañang has stated that this was an unusual GDP growth result for a non-presidential election year. You would expect them to say that, but the problem with their argument is the automation of elections, which makes campaigns more expensive by all accounts as cheating can no longer be achieved centrally at the provincial or municipal levels, as was the case prior to automation, but has to be done at the retail, grass roots level through vote buying.

We cannot discount the fact, particularly in this election which was dominated by entrenched political families, that money might have flowed massively unlike previous midterm elections. This would have meant that provincial and municipal incumbents hit the pork barrel pretty hard in the opening months of the year in a bid to prove to constituents that they were hard at work.

Government spending and construction growth were consistent with this view, along with financial intermediation, which again could have been linked to this. That does not necessarily mean that all this spending went to waste. It just means that a large component of the first quarter growth was seasonal in nature: determined as it was by the political-business cycle.

The third and final point I would make is that the Philippines becoming the fastest growing economy in the region is more about China decelerating than it catching up to China. The two are interlinked though. Let me explain.

During the last decade, China was the workshop of the world. It basically drained the swamp for ASEAN sucking in much of the foreign direct investments in manufacturing. During this time, the Philippines suffered a hollowing out of its industrial base, what little of it that it had.


At some point in this period, China’s income per capita overtook the Philippines’. Demographically, China also started to face the consequences of their one child policy as labour started becoming scarce as investments in China’s interior slowed the migration of workers out to the prosperous coastal regions.

The newly installed Chinese president has also indicated that the government would not sacrifice the environment in pursuing economic growth. Much social unrest now stems from pollution. They are seeking to transition the country away from its dependence on exports and investment. China has basically lost its cost competitiveness and will now have to grapple with the challenges of being a middle income economy.

Early this year, it was reported that inward foreign investments into ASEAN have for the first time equalled that of China. A structural realignment is now taking place. Bangladesh, Vietnam, Myanmar and Cambodia are now the new Chinas. The Philippines could perhaps be benefiting from this trend as well. It probably has less to do with what the government is doing, and more to do with external factors, as I have just mentioned.

All this now puts the onus on government, however, not to “muck things up”. Recall how it inadvertently pulled down growth back in 2011 when it pursued a de facto austerity policy? Let me take the opposing view now and say that this could be the start of a trend, a structural break in economic parlance. In that scenario the one thing that could potentially derail it is the “noise” that we create. Happily for the administration, it won a rare majority in the Senate and kept control of the house (assuming its alliances hold).

The mystery now is what it plans to do with that majority. The ball is in its court. If this sudden growth spurt is to be maintained, then for the next three years, the Aquino government will have to work hard to unclog the investment pipeline in infrastructure, skills and energy that are needed to power its economy through.

Will things like charter change, the proposed Bangsamoro autonomous region, territorial disputes with our neighbours or some completely unexpected Black Swan event throw us off course? That I suppose is the burning question of the day.

Martial Law rumors

Pres Aquino’s trip to the US comes at a time of deep political and social turmoil for the land of the free.

Protest riots in Europe: a sign of things to come in America?

The opening salvo came from Mayor Mike Bloomberg of New York who said on Friday that a prolonged period of high unemployment is producing conditions similar to that found just prior to riots in London (and across Europe as a result of austerity measures). In response to Bloomberg’s comments, Rush Limbaugh an ultra-conservative radio commentator attacked the mayor for his bi-partisan leanings while at the same time agreed with him that chaos was coming and that it would be welcomed by Pres Obama.

Such conspiracy theories were backed by Texas Cong Ron Paul a contender in the ongoing Republican nomination process for president who said that it was in the interest of those espousing big government for a breakdown of law and order to ensue given that it would lead to a public outcry for government intervention to re-establish public order. On Twitterverse, there was some chatter about the introduction of martial law in response to riots and a postponement of elections in 2012.

It just so happens that these right-wing conspiracy theories have occurred on the 40th (update: actually, it’s the 39th) anniversary of Pres Marcos’s declaration of martial law in the Philippines. It now appears that the world has been stood on its head four decades later.

In the past, when Philippine heads of state visited America, they often went cap in hand in search of aid, investment and trade. As P-Noy gets set to pay his respects to the leader of the free world, there will be very little appetite on the latter’s part for taking out the checkbook.

At a time when the US economy struggles with its first credit downgrade in nearly a century, huge fiscal and trade deficits, persistent high unemployment, sluggish growth and rising poverty rates, it wouldn’t be the right time to ask for more help. This visit is all about maintaining and strengthening ties (after Wikileaks revealed some very unflattering remarks made by the former US ambassador to the Philippines regarding our president) rather than promoting trade and investment.

Still, I would look out for the gratuitous announcements of investment dollar commitments that inevitably will come at the end of this trip. Compared with the Chinese catch, it would be interesting to see the return on investment per overseas dollar spent.

…And PIIGS might fly

The following is an interesting chart that shows the projected debt positions of the various PIIGS economies (PIIGS stands for Portugal, Ireland, Italy, Greece and Spain), the US and other economies with triple AAA credit ratings or near investment grade ratings.

It demonstrates why these economies are in such dire straits at the moment. The debts of Greece are the highest at 1.5 times the economy (Greek tragedy). Ireland is next at 1.2 times (the luck of the Irish) and Italy is third at 1.15 times (Italian job).

The US which has been downgraded for the first time in eighty years is projected to breach the 100% debt to GDP ratio after this year given the tepid pace of its economy and expanding entitlement system. Spain has debts at a mere 64% of its economy but is expecting to see them rise on an upward trajectory to 75% by 2016.

Other triple A rated economies either have low debt to GDP levels (Austria, Australia, Denmark and Finland) or are on a downward path to sustainability (France, Germany, Singapore and the UK).

The Philippines and Indonesia which are both one notch below investment grade do not seem to share the problems of the PIIGS with moderate (Philippines) to low (Indonesia) levels of debt and they are both expected to decline over the next few years. The yield of their bonds are trading lower than the Portugal, Ireland or Greece (translation: creditors have greater faith in their ability to repay their debts than the P-I-G economies).

The Philippines stood at the precipice of a sovereign debt crisis back in the last decade with debts rising from 60% to above-70% between 2000 and 2003, but pulled itself back with a combination of increased taxes, fiscal consolidation and a currency appreciation with debts returning to a more manageable level of below-50% in 2007 right before the Global Financial Crisis broke.

The structural adjustment that occurred after 2004 allowed the country to weather the GFC from 2008 to 2010 relatively unscathed. Now that the new government has continued the cautious fiscal consolidation of its predecessor, the question is whether growth will be as robust as it was from 2007 to 2010.

Some might say the fiscal contraction that took place in Q4 of 2010 and Q1 of 2011 will provide the necessary cushion for the government now. The problem is with the slowdown of GDP that the country has experienced this year and into the next few, revenues might not scale up as they were originally projected leaving it with limited options now that fiscal stimulus has gone out of fashion.

Indeed, fiscal contraction has its merits, but it also has its drawbacks when used excessively. Can a country engage in it indefinitely and expect an economic takeoff? Yes, sure it can…and pigs might fly.

A full-blown economic storm

The perfect economic storm is now upon us.

As our political leaders as recently as this week continued to get caught up in the whirlwind of controversy surrounding the former president Gloria Arroyo, a storm of a different kind had been brewing on the horizon.

A few weeks ago, I had warned that the country was sailing right into this tempest almost unaware as its political class seemed more enamored by internal rather than international events. Finally, the stiff economic headwinds that I had been speaking of have finally turned into a fierce global contagion emanating from the US and Western Europe and spreading into Australasia.

The US is already half-way into a lost decade. Recent economic figures point to a prolonged slow recovery, and the likelihood of another recession now imminent. Western Europe is gripped with the bailout woes of the PIIGS economies with Italy now looking more likely to default. A bailout would require Germany and France, two of the largest economies, to undertake austerity measures of their own.

Even after Democrats and Republicans signed a deal to lift the debt ceiling, credit ratings agencies downgraded their outlook for the country as fixing their fiscal house in the long run seemed unlikely given the highly contentious nature of the package required for this almost ceremonial task. The tsunami has now hit Asian markets with East Asia and Australia taking a battering today.

China which has its own version of the sub-prime mortgage crisis developing with town and village councils saddled with loans resulting from its stimulus program could now find its growth slowing to below sustainable levels. And of course, the uprisings in MENA are continuing to raise the price of oil.

The Philippine government which was responsible for restraining growth in the fourth quarter of 2010 and the first quarter of 2011 with its self-imposed fiscal contraction will now wish that it had done more in those periods to foster growth to protect it from the global economic slowdown that now seems apparent.

What is at stake here are the remittances from overseas and the exports of goods (electronics, cars and machinery) and services (tourism and business processing) that have propped up our economy. With demand collapsing in the global economy, don’t expect these flows to materially rise in the coming years.

Secondly, the flow of investments or hot money would in a period of uncertainty normally seek safe havens. Unfortunately, the traditional safe haven of US treasury may no longer be as reliable as before. This could lead to significant depreciation of the greenback which will hit our competitiveness in global markets even more.

Thirdly, the PPPs which the government was hoping to augment its meager 2.5% of GDP spend on infrastructure (5% is the benchmark) could be threatened as investment funds now re-calibrate their tolerance for risk. The emerging market of Asia would be an alternative to the ailing Western economies, but that is no guarantee. With global demand easing, the need for foreign investments to expand production capacity diminishes.

Finally, what is to become of the government’s 7-8% growth target (minimum of 5%) on average for the next five years? It is more likely that global events will weigh down on the prospects for this. The government will have to work harder now to maintain fiscal and economic stability.

Back to the Future with Aquinomics 101

Perhaps PNoy should trade his Porsche for a Delorean.

In his self-appointed role as guru of the new Aquinomics, Prof Cielito Habito of the Ateneo Graduate School of Business alluded to the Reaganomics of the 1980s which preached that less government and lower taxes would promote growth through private investments.

Habito builds the case for an “economics of business confidence” where he points to the revival of private domestic investment which more than offset the drop in public and foreign direct investments during the first three quarters of the PNoy presidency. The hidden messaeg in all this is that when government gets out of the way, private investment soars.

He defends the underspending by the government in its first year by calling it the “economics of fiscal responsibility”. Here is how he explains it:

Some observers now fault the new administration for “underspending,” for indeed, not only has it spent less than it did last year, it has also spent even farther less than what had been programmed to be spent by this time. But before casting this government as inept and lacking absorptive capacity, one must remember that this year’s budget was still drawn up by the previous administration [emphasis added-ES]. And if the current government has been more prudent about spending the money, it could well be because they have found that they don’t have to spend as much as the former government would have, to accomplish as much.

And it seems they have. The Department of Public Works and Highways is one of the biggest “culprits” in the underspending. It turns out that the agency has made dramatic changes in the way public works projects are costed out, leading to substantial savings. For one thing, Public Works Secretary Rogelio Singson has significantly reduced allowable “indirect costs,” including contractors’ profit margins (and quite likely the so-called “bukol”), in public works projects. Coupled with a strict policy on transparent public bidding, the agency boasts of more than P2 billion in savings from 2,797 projects over the past year.

It seems quite astounding that Habito could claim that this year’s budget was drawn up by the previous administration. It beggars belief given that the president’s men spent the first six months engaged in a zero based budgeting process to weed out undesirable projects left behind by Mrs Arroyo.

While his explanation for the delays in DPWH disbursements remains plausible, it does not explain the delays in all the other departments. It would also appear dubious or incomplete when stacked against the DBM findings that delays in DPWH were due to re-alignments requested by regional offices.

But the more disturbing problem is that Habito conveniently disregards the evidence regarding spare capacity in the economy for capital spending. At a time when unemployment is rising, he has the audacity to suggest that it was a good thing for government to put its foot of the accelerator.

Habito like most of our economists seems to be taking his cue from the West where austerity measures seems to be taking hold as deficit hawks seem to gain ascendancy in the debate in both Europe and America.

Nobel Laureate Prof Paul Krugman who argued for a much larger stimulus under Obama back in 2009 and has been proven right by recent events with the stalling US recovery notes how the “Triumph of Bad Ideas” (referring to Reaganomics) has taken place. He is not alone in this, another Nobel winning economist Joe Stiglitz backs him up.

The same sort of triumph seems to be taking place in Aquinomics with the Palace announcing it has no plans to introduce any new tax measures in 2012 despite its intentions to increase spending to 1.8 trillion pesos from the current 1.6. The hubris of this plan is that they believe efforts to improve collection will work wonders in their second year when it clearly has not happened in the first.

Despite Prof Winnie Monsod’s calls for higher tobacco taxes and Prof Ben Diokno’s proposal for fiscal adjustment plan, Malacanang seems to be confident in its Aquino doctrine that “no new taxes” are needed. This makes the fulfillment of its 2012 expenditure program a pipe dream, just as the 2011 one led to “trickle down” economics with social expenditures actually dipping while military and police spending increased.

We need to recall that it was the result of tax reforms adopted under Cory Aquino for whom Monsod and Diokno are proxies that revenues from taxes as a share of the economy went up, and those under Fidel Ramos for whom Habito is a proxy that they gradually got eroded. The problem however is that in the battle of ideas, it seems the argument of Habito trumps that of Diokno and Monsod.