Business World, 20 May 2014


The monetary authorities hiked the reserve requirement ratio (RRR) — from 18% to 20% — presumably to reduce the liquidity in the country’s financial system by some P120 billion. That’s a wrong move. In the face of a tight government spending policy, it has the effect of constricting, not stimulating, economic growth.

A celebration after two years of strong growth is premature. More needs to be done to sustain and deepen economic expansion. Those who proclaim that the Philippines is at the cusp of tigerhood have to be delusional. There were many false starts in the past.

Among its ASEAN-5 (Indonesia, Malaysia, Singapore and Thailand) peers, the Philippines has the worst unemployment rate and the highest poverty incidence. One in four Filipinos is poor. For many reasons, including its poor infrastructure and unwelcoming business environment, it has also attracted the least amount of foreign direct investments (FDIs).

During his almost four years in office, the administration of Benigno S.C. Aquino III has pursued a restrictive spending policy. It allocated a small budget for public infrastructure, even in the face of the widening infrastructure gap between the country and its ASEAN-5 neighbors.

Where more rapid spending for public infrastructure was required to make up for past neglect, the administration responded by budgeting — and spending — modestly for public infrastructure.

At a time when higher government spending for public infrastructure is called for, actual budget deficits continue to fall — from 3% of GDP in 2010 to 1.4% of GDP in 2013.

Fortunately, during the last three years, the conservative spending policy was complemented by a supportive monetary policy. Put differently, the above average GDP growth in 2012 and 2013 has been due largely to the easy monetary policy. Without it, growth could have been lower.

But now comes the Bangko Sentral ng Pilipinas (BSP)’s own pivot, a shift towards a tight monetary policy. A restrictive fiscal policy complemented by an unsupportive monetary policy spells trouble for sustaining economic recovery.


While there is a great need for catching up, the government responded by skimping on public infrastructure. During the last three years, actual public infrastructure spending as percent of GDP was less than 2%. The general consensus is that it should be at least 5% of GDP.

Was the fiscal conservatism due to the desire to garner the administration’s most coveted trophy — the ratings upgrade? Or was it due to the unfounded confidence that the public-private partnership (PPP) projects would take off with little delay?

If it was the first, that is, sacrificing investment in public infrastructure for lower deficits, then the government was being shortsighted. It sacrificed the long term for the short-term.

The need for public infrastructure is staggering. The harsh truth is that it is not possible for the Philippine to sustain economic growth of 7% in the next 10 years unless there is a dramatic improvement in its public infrastructure. The power supply is sputtering. The existing urban transit system is bursting at its seams. And the roads and highways are not only crumbling, they are also heavily congested. Its airports and seaports are old and decaying.

But the irony is that having an investment upgrade and making up the huge deficiencies in public infrastructure are not mutually exclusive. We can have both. The government may choose to spend another percentage point of GDP to finance public infrastructure, and the deficit would still be manageable.

There’s virtually no risk that financing the higher deficit would crowd out the private sector. Interest rates are at rock bottom. The Philippine may not even have to borrow from abroad since the Bangko Sentral is sitting on hefty gross international reserves and Philippine banks are awash with cash. Thanks to the 10 million Filipinos abroad, the economy is assured of some $20-$25 billion in remittances from abroad yearly.

The Aquino administration grossly miscalculated the impact of the PPP initiative. It thought the program would take off smoothly. But by any standard, its PPP initiative has been a monumental failure. Only seven out of more than 50 PPP projects have been awarded, a majority of which are small social projects, and none has been completed to date.


The Aquino administration has to face another harsh reality: its incompetence. What little has been budgeted by the Executive and authorized by Congress, has not been spent fully.

In 2011, a measly 1.9% of GDP was budgeted for public infrastructure; only 1.6% was implemented. In 2012, the equivalent of 2% of GDP was budgeted for public infrastructure, only 1.8% was implemented. Finally, in 2013, the equivalent of 2.2% of GDP was allocated for public infrastructure, only 1.9% was implemented. This is not a case where there is efficiency gain, with physical outputs produced at less cost. It is a case where some projects were simply not implemented.

During its first semester in office, from July to December 2010, the Aquino administration rationalized project delays on three grounds: first, the need to review existing rules and procedures; second, the need to clean up the mess left behind by the previous administration; and third, learning by doing. Granted, but after the six-month learning period, one might rightfully blame further delays on pure incompetence.

Sadly, this woeful project implementation performance continues. For example, six months after super typhoon Yolanda devastated parts of the Visayas, the massive reconstruction work has yet to pick up.

Of the more than P100 billion that Congress had appropriated, only P3.7 billion have been released (not necessarily disbursed) to appropriate agencies and local governments. Worse, the Aquino administration has built only 50 houses for the estimated one million families displaced by typhoon Yolanda.

Is there hope in sight? In its final two years in office, can the Aquino administration transform itself from a slow, dodgy, inefficient implementing machine to a quick-moving, well-oiled and effective one?