Bernardo M. Villegas
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Transitioning to the Next Administration (Part 1)

           In the briefing last April 5 given by the economic team of the present Administration, it was claimed that the Duterte Government is handing down to the next Administration an economy with strong fundamentals that will enable continuing sustainable and inclusive growth in the years to come.  This is no empty boast.  Indeed, the next Administration will have a lot to thank President Duterte and the key executives in his economic team for the enlightened policies and programs that can keep the GDP growing at least at 6 to 7% for the next six years or so and for the poverty incidence to be brought back to the 14 to 16% that was within reach before the pandemic. If we look back at the last decade, the growth rate of GDP was sustained at an average of 6 to 7 % without fail from 2011 to 2019.  It is notable that this time period was shared by two Administrations, i.e. 2011 to 2016 under President Nonoy Aquino and 2016 to 2019 (just before the outbreak of the COVID-19 pandemic) under President Rodrigo Duterte.  The two Presidents couldn’t be more different in terms of personal qualities and styles of governance.  They, however,  shared a common denominator of appointing some of the best and brightest to the key positions in the economy, finance, industry and agriculture—sectors which had most to do with economic development.  President Duterte’s team did what other previous Administrations had generally followed:  build on the accomplishments of the past and contribute innovative ways of keeping the economy growing and distributing better the income generated.  For example, we can admire the way the four past Administrations have kept our debt-to-GDP ratio and our fiscal deficit at very manageable levels, leading to constant upgrades of our credit standing.  Just before the pandemic, the Japan Credit Rating Agency upgraded the Philippines from Triple B+ to A-.  The GDP growth rate maintained at 6 to 7% during the second decade of the Third Millennium and the prudent fiscal management they observed in the Philippine economy prompted a good number of independent think tanks, publications and financial institutions to heap praises on our future prospects, removing from us the label “the sick of Asia” from which we suffered towards the end of the last century and the initial years of the present one.

          For example, in November 2019, the Oxford Economics group ranked the Philippines as the second leading emerging market that will dominate the global economy in the next decade, second only to India and outranking Indonesia, China and the other economies in Indo-Pacific region.  Jim O’Neil of Goldman Sachs (the originator of the BRIC acronym) included the Philippines among the Next Eleven Emerging Engines of Growth, the only ASEAN country making the list together with Indonesia and Vietnam.  Already at the height of the pandemic in December 20,2020, another prestigious think tank in the UK, the Center for Economic and Business Research (CBER) made a world economic forecast for 193 countries from 2020 to 2035.  The Philippines was among the most improved in the forecast, jumping from rank 32 in 2020 to 22 in 2035. On May 2, 2020, the weekly economic magazine The Economist ranked the Philippines No. 6 among 66 countries on four measures of financial strength, bested only by Taiwan and  South Korea in East Asia.  In a study entitled The Wider World in 2050, the Hong Kong Shanghai Bank gave the Philippines the highest improvement in rank (improvement of +27) projecting that by 2050, the Philippines will rank No. 16 in GDP by 2050. As already mentioned above, on June 11, 2020, the Japan Credit Rating Agency upgraded the Philippines from BBB+ to A-.  These unbiased assessments from outside institutions are testimonies to how the Philippine economy had been slowly but surely making progress from one Administration to another.  The Duterte Administration is no exception.

The major contributions of the Duterte Administration to this arduous  process of institution building and enlightened policy making have been the CREATE law which can bring in much higher tax revenues as the economy recovers from the pandemic; the Build, Build, Build program which has increased the public investment in infrastructures from below 2 % in the past to an average of 5 to 6% under the outgoing Administration; and the amendment  of Pubic Service Law which can bring in substantially more foreign direct investments (FDIs) especially in critically needed infrastructures like telecommunications, airports, expressways and tollways, railways and shipping as the next Government struggles to pay the trillions of pesos of debt that had to be incurred to address the pandemic crisis.  This last very positive development is especially providential because of the dire straits in which the next Administration will find itself as regards debt and fiscal management.  Our debt-to-GDP ratio has increased from the average of 30 to 40% in the past to 60% today and our fiscal deficit has ballooned from the average of 3% to over 8%,  which ratios are untenable and will make it difficult for the Government to raise more long-term capital to continue its Build, Build, Build Program.

          Where will the next Government obtain the long-term capital needed to continue improving Philippine infrastructures by making sure we are investing 5 to 6 % of our GDP in this vital sector.  The answer is a no brainer:  Foreign Direct Investments.  It is highly improbable that we can continue to borrow, borrow, borrow until we bring back our debt to the more reasonable levels that prevailed  before the pandemic.  Thanks to the passing of the law amending the Public Service Act, foreign equity can flow more freely in some of the most vital infrastructures needed for our next stage of industrialization called Industrialization 4.0. to which the next Government has to devote a great deal of attention.  Fortunately, there is a good sign that our country is beginning to catch the attention of direct foreign investors.  One positive sign is that even in the height of the pandemic, in 2021 our FDI figures reached $10 billion, one of the highest in the last decade or so.  At the twilight of the Duterte Administration, the Department of Trade and Industry (DTI) announced that in the next twelve to eighteen months, some 250 foreign investment leads worth $8.8 billion (PhP450 billion) are expected to come to the country.  These investments are in such sectors as electronics manufacturing services (EMS), integrated steel mills, telecom services and digital infrastructure, renewable energy, knowledge processing/business process outsourcing, logistics, automotive and autoparts/EV/mineral processing/battery manufacturing/ and garments and textile.  It can be reasonably expected that these identified potential investments can be followed by even bigger investments in such sectors as airports, railways, expressways, tollways and shipping that are now open to 100% foreign ownership, thanks to the amended PSA law.

          Will the Philippines be attractive to foreign director investors?  The 6 to 7% GDP growth rate expected in the next six or more years, whoever will be elected in the May 2022 elections, will be among the highest in the Indo-Pacific region.  The attractiveness of the Philippine economy to both domestic and foreign investors is primarily based in its huge domestic market propelled by the purchasing power generated by the OFW remittances and the earnings of the BPO-IT industry, soon to be bolstered by the quick recovery of domestic tourism which will soon see 60 to 70 million Filipinos traveling once again to scores of attractive tourism sites made more accessible by the Build, Build, Build program. It must be always kept in mind that consumption expenditures are the main engine of growth of the Philippine economy, accounting for some 70% of GDP.  This explains why the Philippine economy is one of the most resilient during times of global crises like we are experiencing today as a result of the Russian-Ukraine war. In fact, this was recognized by the Organization for Economic Cooperation and Development (OECD) that recently forecasted that the Philippine economy will grow fastest in the ASEAN this year, despite the high prices of oil and other commodities in the global market and of rising inflation in general that has reached 7% or more in some advanced countries.

          These  positive assessments of OECD of Philippine growth prospects are in line with the evidences we can gather about how the Philippines fared during the two most serious global economic crises in the last thirty years.  During the East Asian Financial crisis in 1997 to 2000, Philippine GDP was the least negatively affected, except Vietnam, among all the East Asian countries.  While its neighbors like Thailand, Indonesia and Malaysia suffered huge declines in GDP of anywhere from -7.6 to -13.4%, Philippine GDP had an almost imperceptible decrease of -0.6 %.  Something similar occurred during the Great Recession of 2008 to 2012 when oil prices also reached the level of $140 per barrel and mammoth banks like Lehman Brothers were collapsing.  The Philippine economy continued to register positive growth rates in 2009 and by 2012 was already growing at 6.7%, next only to Thailand.  The main reason for this resilience in the midst of global crises is the relatively low export-to-GDP ratio in the Philippines.  When the world is in turmoil, it is reasonable to expect countries like Singapore, Hong Kong, Thailand, Malaysia and other heavily export-oriented economies to be in serious trouble.   Not the Philippines.  Our businesses, large or small, continue to thrive by selling to the 110 million consumers (as of today).  To be continued.