Business World, 31 July 2012
The national government has to complement, through bold executive actions, the decision of the monetary authorities to cut interest rates to 3.75%. The monetary authorities’ move was designed to address the threat of a surge in capital flows which could lead to sharper peso appreciation which, in turn, could slow economic growth.
The decision of the Bangko Sentral ng Pilipinas’ Monetary Board to reduce interest rate will narrow the difference between yields of Philippine securities and US Treasuries. The narrower gap gives “footloose capital” investors less incentive to invest in peso-denominated securities instead of US treasuries.
But while the direction of the impact of the interest cut is unequivocally positive, its magnitude is uncertain.
For many analysts, the rate cut is important in a different sense. It is also an implicit admission by monetary authorities that the much-hyped growth rate, expressed in terms of the 6.4% gross domestic product (GDP) increase in the first quarter of 2012, is not sustainable.
Even the adjusted World Bank and the International Monetary Fund (IMF) growth forecasts support this realistic view. The World Bank’s new GDP growth forecast of 4.6% implies that the Philippine economy will slow to an average GDP growth rate of 4.0% in the last three quarters of 2012. Likewise, the IMF’s adjusted GDP growth forecast of 4.8%, implies an average GDP growth rate of 4.3%. That’s just simple math.
The prospect of a slower GDP growth in the last three quarters of 2012 should alert Philippine policy makers.
It’s better to prepare for a slowdown than hope, against hope, that 6.4% growth is forthcoming. The odds are against it.
The best way to prepare for the slowdown is twofold: first, Malacañang should complement the BSP move by announcing that the Philippine government will not borrow from abroad this year and possibly until 2016; and second, it should ramp up, and better yet, expand the public infrastructure program.
The first move — an expressed and forward-looking announcement — will stop the entry of foreign proceeds for several years. Foreign debts will be paid for by borrowing locally and convert the same by going to BSP. I understand BSP has allocated P200 billion for this purpose.
This move should be complemented by instructions to heads of government-owned and -controlled corporations to stop borrowing from abroad. They should source their capital expenditure requirements domestically. It is better to borrow from Filipinos than from foreigners.
The second move is meant to increase the demand for dollars. Many of the large-scale projects have high import content. The sooner these projects are started and completed, the greater the demand for foreign currencies which, effectively, will increase the demand for dollars.
The Philippine government should not be content with front-loading public infrastructure spending. It should aspire to raise the level of spending, up to P500 billion annually.
The present level of public infrastructure is inadequate, roughly 2% of a P10-trillion economy.
But higher budget for public infrastructure won’t make a lot of difference if they will remain unspent.
After two years in office, the Aquino administration is still bogged down in problems associated with disbursing funds already authorized by Congress.
What’s the solution for the poor absorptive capacity of the Executive branch?
The wrong solution is to realign (impound) funds already budgeted for a particular slow-moving agency. If one were to believe that the entire national budget has gone through careful review, using zero-based budgeting, then what is being withheld, impounded, realigned are essential for growth and social progress.
Appropriations do not expire after one year. The adjustments should be made in future budgets.
Impoundment of authorized appropriations is tantamount to penalizing potential beneficiaries (farmers, students, elderly, the economy in general) of public funds. It’s better to tolerate some delays for worthwhile projects than realign them for quick-disbursing projects which have not been expressly approved by Congress.
When programs and projects are moving slowly, the appropriate thing to do is to penalize the head of the underperforming department. The message to the errant secretary should be crystal clear: step up or walk out.
Massive realignment of funds will make project monitoring more difficult. Monitoring of a moving target is extremely burdensome and does not promote transparency.
Massive realignment of funds changes budget priorities as authorized by Congress. Some funds for capital projects are realigned for salaries and wages; appropriations for some worthwhile high priority projects may be realigned to low-priority, quick-disbursing projects.
The changes in budget priorities may result in major realignment of political powers. The congressional power of the purse will be watered down, while the power of the Executive branch to finance projects previously not cleared with Congress is enhanced.
The Executive branch is guilty of putting a positive spin to its clear failures to move programs and projects and collect taxes.
For example, the lower-than-expected budget deficit is attributed partly to higher revenue collections.
The reality is that the two tax-collecting bureaus — the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BoC) — have missed their respective revenue targets.
The BIR promised to collect P535.4 billion for the first half of the year, or 51% of the annual revenue target of P1.07 trillion. It collected only P521.2 trillion, P14.2 billion or 2.7% short of semestral tax target.
The BoC promised to collect P167.2 billion for the first half of the year, or 46% of the annual revenue target of P365.1 billion. Yet, it collected only P143.4 billion, P23.8 billion or 6.5% short of the semestral tax target.
The naked truth is that the deficit would be even lower — P19.5 billion rather than P34.5 billion — had the government revenue agencies collected what they promised to collect.
The P19.5-billion adjusted deficit is about one-sixth of the planned budget deficit of P109.3 billion for the first half of the year.
Sadly, for a weak economy which needs higher and faster government spending, the sharply lower-than-planned budget deficit is an indication of failure, not success.