Officials are writing off the first semester and counting on better economic conditions in the second half to lift growth and meet their targets for the year.
Even before the release of second quarter GDP results at the end of August, the government is downplaying expectations for a sharp rebound after the deceleration of growth to 4.9% in the first quarter from 8.4% the previous year with one trade official saying he expected growth to be below 5%.
Exports are expected to take a hammering, shrinking by 5%. This is a far cry from the industry growth target of 8-10%. And while the Bureau of Investments reported a tripling of approved investments in Q2, it remains to be seen if such commitments truly materialize. A very credible analysis of such investments points to a very low and sometimes negative correlation between commitments and actual spending.
The public-private partnerships that were meant to be awarded in the first half have been put off for later in the year and next year. Although the agricultural sector benefited from the early rains, such weather would not have been auspicious for public works projects.
With black swan events such as the Japanese tsunami and uprisings in MENA hampering growth in the first half, economic planning officials are now banking on reconstruction efforts in Japan and more settled oil markets to help prime our economy in the second half. Our prospects seem to be driven entirely by external events.
The NEDA director general has also slated an acceleration of public infrastructure spending to counteract the adverse effects of events in the US and Europe. The public infrastructure budget however is a mere 2.5% of GDP, not the sort of magnitude that would influence growth.
What would make matters worse is if consumer sentiment sours. That would dampen the enthusiasm of businesses to invest which is what propped up growth in the first quarter. Gone are the optimistic projections of hitting 7-8% this year. The government would be happy just to reach 5% in this climate, the minimum required under its development plan.
On the other hand, the “fiscal consolidation” the government undertook in its first year in office has reaped praise from external agencies all around. The S&P which many fault for downgrading the US economy while giving a triple a rating to toxic subprime mortgages gave the Philippines a big thumbs up of approval.
It has signaled however that further upgrades would depend on whether the government can raise revenues given that future growth would depend on government unblocking crucial bottlenecks to development. The challenge is how to accomplish that without stunting growth, particularly with a global downturn on the horizon.
What to do now?
It is quite ironic that with global markets reeling on fears of advanced sovereign nations defaulting on their loans, that the cost of borrowing should go down for the US and the Philippines as funds shy away from risky portfolio investments and into fixed income securities.
As Barrack Obama prepares to roll out his economic plan in the US to address the depressed jobs market there, what policy options are open to P-Noy and his government to consider in its second year in the Philippines? Let’s examine some of them here.
1. Stimulus or austerity? Unlike America which scaled a “wall of debt” to stimulate its economy (not very successfully) during the last global financial crisis (see chart), the Philippines experienced a relatively soft landing with government debt as a share of GDP returning to pre-crisis levels.
The debt of the US is expected to rise even further according to IMF projections from 92% of GDP in 2010 to 112% by 2016. The Philippines by contrast is expected to see its government debt decline from 47% in 2010 down to 40% by 2016, albeit still higher than the ASEAN average.
This actually affords the country some “fiscal space” to deal with any downturn that might occur in the coming years. The US has basically run out of ammo to engage in what economists call countercyclical spending aimed at boosting demand in a period of weak growth.
The government could ramp up spending on social welfare programs like the conditional cash transfers, universal health, land reform and distribution or provide more economic infrastructure and services such as farm to market roads, irrigation, clean water and sewerage systems. On the other hand, the government might opt to wait until it restores the budget to surplus, before engaging in new spending measures.
With the fiscal incentives and sin tax rationalization bills endorsed and making their way through Congress, the administration hopes to boost its fiscal capacity to engage in either deficit reduction, fiscal expansion or both.
2. Protect or open up? A second set of prescriptions has to do with whether the government should be opening up more sectors to trade and investment. The country’s trade balance after cratering in the early part of the last decade started to grow in sync with its ASEAN neighbors towards the latter part of it (see chart).
Unlike America which has had chronic trade deficits because of its trade imbalance with China, the Philippines has experienced a positive trade surplus with China for all but the last years of the last decade. Compared to Indonesia which is still primarily concentrated in commodities and low end manufacturing, the Philippines has a more diverse economy demonstrating the capacity to produce more technologically sophisticated products.
Some have called for charter change in order to ammend the economic provisions of the constitution prohibiting foreign ownership of companies in certain sectors (utilities, property and education), and from engaging in their professions (unless specified by law). These protectionist clauses they say have been a major hindrance to attracting direct foreign investments.
That argument might be hard to prove, but removing absolute restrictions and moving to a regulated framework might be a good move given the direction certain bilateral and multilateral trade agreements in the region are headed.
Some might fear the opening up or globalization of the economy reduces our flexibility in creating competitive industries particularly in vulnerable sectors, however, such fears are not shared by other countries which traditionally have used protectionist policies to build their export sector.
3. Intervene or stand back? Another set of policy options has to do with influencing incentives for trade and investment in the country. Should the government provide help to struggling industries with fiscal incentives or should it take a more neutral stand and simply welcome any form of investment?
There is an ongoing debate in policy circles about whether manufacturing drives productivity and therefore needs to have special government policy directed at boosting it.
The Philippines and India seem to be more service based economies than China and the rest of East Asia (see chart). As wage rises increase the cost of production in the coastal provinces of the People’s Republic, opportunities exist for relocating lost manufacturing plants back in the country.
This could be the market’s way of correcting an imbalance that has been maintained aritificially with the Yuan’s undervaluation, so in that case can government help it along and how?
As they embargo possibly disappointing statistical information prior to their release, economic managers are pinning their hopes on a second half recovery. If their first year in office was all about consolidating the nation’s fiscal position, the second will be all about providing the necessary conditions for growth.
As markets in the North Atlantic countries take time to sort out their fiscal mess, countries in emerging Asia will have to rely on consumer spending to prop up their domestic economies.
In its short stint in office, the PNoy administration will be tested on whether it can truly maintain fiscal consolidation (as most reform efforts in the past have sputtered out) while supporting social safety nets and growth. In this regard, not all things are externally driven. The policy choices it makes will determine the course the economy eventually takes.