Business World, 27 March 2012

In recent weeks, Filipino leaders, starting with President Aquino III, have gone into an aggressive PR offensive announcing to the world that the Philippine economy is doing well. The stock market is booming and the peso is strengthening. The the country’s credit ratings have been upgraded, though it remains notches below investment grade. And foreign direct investments into the country have reached record levels.

But what about the stubbornly high poverty rate and the rising hunger rate? What about the highest unemployment rate in this part of the world? The lack of jobs has been the main source of poverty. There are some three million unemployed and seven to eight million underemployed. The job market will continue to be put under a lot of stress with some one million new entrants to the market annually.

But what about government’s ineffectiveness to move projects? What about the stagnating tax effort (taxes as percent of GDP) at a low 12%? What about the stalled public-private partnership projects?

And what about the high costs and unreliable supply of power in the country? What about the crippling power crisis in Mindanao, a grim reminder of the serious power failures and outages during the waning years of the Aquino I presidency?

Optimism is good but it has to be within bounds of reason. Optimism has be balanced with a great sense of realism. The gravity of the problems and the severity of constraints have to factored in when making policy pronouncements. As the great writer Ralph Waldo Emerson said: “Great men, great nations have not been boasters and buffoons but perceiver of the terrors of life and have manned themselves to face it.”

The reference to the soaring stock market and the strengthening peso reveal the poor economic quotient of Palace officials and other “economic” managers. The soaring stock market is a result of significant inflow of ‘hot money,’ which takes advantage of the high interest rates in the Philippines compared to the near-zero rates in the developed economies. While other countries have adopted measures to discourage the entry of “hot money,” the Philippine monetary authorities have remained, by and large, passive.

In the absence of an active policy to discourage the entry of “hot money,” say by requiring a-year residency requirement for portfolio investment, the temporary benefits afforded by such inflows may prove to be destabilizing in the long run. Any hint of weakness in the domestic economy could lead to a massive outflow of these “footloose” capital.

The entry of “hot money” may be welcome if it would lead to more factories, more modern farms, and more jobs in the local economy. But that’s a oxymoron.

An economy that lives by hot money dies by it.

Malacañang officials celebrate the strengthening of the peso. But a strong peso does not — repeat does not — necessarily mean a strong economy. They seem to be falling for the same fallacious belief as other previous Malacañang occupants.

A strong peso puts additional pressure on the ailing exports sector and the struggling manufacturing industry. As a result, it destroys, not create, jobs. Sadly, a stronger peso creates jobs outside Philippine territories as it encourages imports of goods that can be produced locally.

A strong peso creates havoc on the lives of 10 million overseas Filipinos and their families at home. Their (dollar, yen, dinar, etc.) remittances would buy less goods and services than better. A strong peso reduces consumption, slows investment in housing and other consumer durables, reduces spending for education and health care; in other words, it results in lower welfare for more than half of the Filipino people.

The massive inflow of hot money which leads to higher activity in the stock market and the appreciation of the peso results in greater misery for a large majority of Filipinos. That’s not a cause for celebration.


After two years in office, Mr. Aquino would show an economy that is performing well below its long run growth potential — a GDP growth of 3.7% last year and possible 4.2% this year, or an average of 3.95%.

But the 4.2% growth will be lower than the 5.5 to 6.5% official growth target, and will be much, much lower than the government’s aspirational goal of 7 to 8% GDP growth.

The 5.5 to 6.5% GDP growth target was set long before the world economy turned grimmer. The UK-based Standard Chartered Bank is keeping its outlook of slower Philippine growth this year at a low of 3.2%. “For now, our growth outlook for the country has not changed… too much of what would happen externally would affect the growth of the country,” said Mahendra Gursahani, chief executive officer and consumer banking head of Standard Chartered in the Philippines, in an interview with BusinessWorld this week.

But 4.0% growth is not good enough. The World Bank said that the Philippine economy has to achieve growth above 5% a year on a sustained basis in order to improve the lives of the poor and to catch up with its Southeast Asian neighbors. “A huge window of opportunity currently exists for speeding up critical reforms,” said World Bank Country Director Motoo Konishi.

Sadly, there is a big difference between facing a window of opportunity by acting, seizing the day, accelerating reforms to achieve strong, sustained growth and simply staring at it. The president’s major enemy is his own shadow. For as long as he believes he’s doing well in solving the country’s ills, he won’t act boldly and decisively, thus end up solving nothing.

The nation’s ills are enormous. Rising population, deep poverty and rising hunger rate, joblessness, ineffective bureaucracy, inefficient, inequitable and low-yielding tax system, crumbling infrastructure made worse by shortage of power supply, high costs of doing business, unattractiveness as an investment destination because of the high costs of doing business — these are just the major ones.


Here’s the scorecard since President Aquino took over 19 months ago. Stock market index up. Inflation rate low and stable. Peso value up, trending to P40 per $1.

Foreign direct investments down. FDI inflow to the Philippines continue to be lowest in the region. BSP data showed that the net inflow of FDIs reached $1.26 billion last year, down by 2.8% from the $1.298 billion registered in the previous year. Bluntly, this is not a sign of investor confidence.

Poverty rate steady but number of poor people up. Hunger rate up and number of people who experienced involuntary hunger higher.

Unemployment rate basically unchanged but number of poor people up.

Costs of doing business worse than ever. A recent joint publication of the World Bank and the International Finance Corp., Doing Business 2012, published on October 20, 2011, ranked the Philippines 136th out of 183 countries in the world. It ranked the poorest among ASEAN-5 countries. Thailand ranked third, Malaysia fourth, Vietnam 98th, and Indonesia 129th. It ranked among the lowest fourth of all 183 countries covered in the study.

Public authorities have the responsibility to tell the people the truth. Unlike rich businessmen and firm owners, who may have highly trained experts in their staff, or have the resources to subscribe to studies done by economic think tanks, the ordinary man on the street has no other choice but to rely on what the government peddles as truth.

If government officials told the ordinary man in the street that the economy would do well, when the economy might be slowing, he may behave differently. He may spend his money rather than save as a hedge for the uncertain future. In this sense, overoptimism has a cost.

But what about public officials who predict a rosy future when a slower, more modest, growth is likely? Shouldn’t they be held accountable for missing their economic targets? For example, if they predicted an economic growth of 6.5%, but the economy grew by only 3.6%, shouldn’t they be held accountable for failing to meet their targets?