Business World, 14 January 2014


Even before the man-made and natural calamities hit the Philippines in the final trimester of 2013, the Philippine economy has shown signs of slowing down. The third-quarter GDP grew much slower than the first two quarters, and the economy is expected to significantly slow further in the fourth quarter.

Many economists, myself included, foresee that, on a full year basis, the Philippine economy will settle at slightly below 7% GDP growth, closer to the upper limit of the government’s 6 to 7% growth in 2013.

At the same time, the general consensus is that the Philippine economy would slow to around 6.0% growth in 2014, largely because of base effect (2013 growth was unusually high), the continuing weakness of the global economy, including the US, and the growing sense that the Aquino administration would fail to deliver on what he promised to deliver.

Fitch Ratings has a slightly lower economic growth forecast for the Philippines in the next two years: 5.5% in 2014 and 6% in 2015. Both are lower than the government’s forecast of 6.5-7.5% and 7-8%, respectively.

The rating agency suspects the sustainability of the strong growth in recent years. It said that compared to its regional peers, the Philippines has weaknesses such as low government revenues and low average per capital income.

With President Aquino’s no-new-tax policy, it would be impossible to achieve a tax-to-GDP ratio of 17%. Improvements in tax administration can only do so much.

In the meantime, with high population growth, and with the Reproduction Health Law stuck in the Supreme Court, per capita income will continue to stagnate.

With the recent man-made and natural calamities that hit the Philippines in the second half of 2013, the emerging consensus is that poverty will get worse before it gets better.

Not surprisingly, the December 2013 poverty Social Weather Stations (SWS) survey results show that more families considered themselves poor — 55% of respondents or 11.8 million households, up from 50% three months earlier (September 2013).

The worsening poverty was practically uniform across geographical areas: in the National Capital Region, the proportion of households who rated themselves poor rose from 44% in September 2013 to 46% in December 2013; in the rest of Luzon, it rose from 42% to 50%; in the Visayas, it rose from 62% to 68%; and in Mindanao, there was a slight improvement from 61% to 59%.

But the improvement in Mindanao can be explained by the sharp increase in self-rated poverty in September 2013 to 61%, from 47% in June 2013, due to the armed conflict in Zamboanga City which erupted in Sept. 9. The Third Quarter 2013 SWS survey was done a few weeks later (Sept. 20-23).


Sustaining strong growth requires deeper and long-lasting economic reforms. But with Mr. Aquino’s presidency fast coming to a close, and with eroding political support, the emerging sentiment is that he may be unwilling to institute real reforms before he steps down in June 2016.

During the last three years, foreign direct investors have not brought long-term capital into the Philippines in a big way. The Philippines has received the lowest total foreign direct investments (FDIs) among the ASEAN-5 economies: Indonesia, Malaysia, the Philippines, Thailand and Singapore.

By now, foreign investors are convinced that President Aquino will not open up the Philippine economy by amending some restrictive provisions of the Philippine Constitution. It would take a miracle to have his position reversed. Miracles do happen. But time is not on his side.

Another challenge for the Aquino administration is how to address an uncertain, still weak, world economy.

The US has shown some signs of economic recovery. Hence, there is now an increasing pressure for the US Federal System to start the tapering off its loose monetary policy, specifically the $85 billion monthly purchase of government bonds.

Recently, the Fed announced that it will cut $85 billion monthly bond purchases down to $75 billion, or by $10 billion. A conservative move, but nevertheless a clear signal that the taper has started.

The speed of the taper would depend on progress in the real economy, specifically the jobs market. As unemployment in the US goes down (remains unchanged), the Fed would be encouraged to step up (ease up) tapering.

The recent unemployment news is not encouraging. The government reported just 74,000 new jobs in December. The unemployment rate dipped, fueled by workers giving up their search for work.

Here’s an appropriate view on tapering by Philippine leaders and policymakers: a faster tapering by the US Fed might nip the global economic recovery in the bud. While the taper might be the right thing to do in order to reduce the risk of a more serious US fiscal crisis down the road, a faster than warranted tapering might raise interest rates, which will result in the US sucking in a lot of portfolio investment. This will cause the US dollar to appreciate, and as a result, cause the euro and the currencies of emerging countries to depreciate. The likely outcome is a slower world economy. The newly confirmed Fed Chairman has to walk a tightrope — how to taper without reigniting another global recession.

What’s the impact of another global slowdown on an already slowing Philippine economy? It will exacerbate the slowdown in the short run. The flow of hot money will continue to move away from the Philippines and go back to the US. Clearly, the bigger risk is the speed of reversal.

The heavier the outflow of “hot” money, the more serious its impact on the Philippine stock markets, and the ability of Philippine businesses to raise capital for future investments. The negative wealth effect could also affect consumption and investment.

On the positive side, the weaker peso will increase the peso value of the OFW remittances. As a result, this will increase consumption and private investment, and thus overall economic growth.

In the medium term, it might even breath new life to the moribund export sector and dampen somewhat the importation of foreign goods.

A weaker peso is a natural shield for the domestic industries. As the peso weakens, the attractiveness of imports is reduced, as they become more expensive. Products that can be produced domestically rather than be imported will result in higher economic activity at home. That would create more decent jobs here, rather than creating jobs abroad. Such a shift in trade policy is consistent with the goal of strong, sustainable and inclusive growth. Again, it is worth repeating, our top priority should be creating more decent jobs at home rather than exporting raw labor abroad.

A weaker peso might even be good for the Bangko Sentral ng Pilipinas (BSP), as it would reduce its huge losses as a result of the peso appreciation.

With the peso appreciating, BSP’s request from Congress for an additional fund infusion of P150 billion might be cut somewhat. By doing the right thing — that is, by letting the peso depreciate a little bit or not letting the peso appreciate further — the burden on Filipino taxpayers will be reduced.

In sum, the Philippine economy will face a slower and riskier 2014. There will be twists and turns down the road, and our national leaders and technocrats should remain focused and adept considering the challenges ahead, always keeping in mind what’s the greatest good for the greatest number.