Bernardo M. Villegas
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Transitioning to the Next Administration (Part 2)

          Neither the transition to the next Presidency nor the global economic crisis will prevent the Philippine economy from growing at least at 6 to 7% during the current year.  That is my prognosis based on our actual performance during the last thirty years.  We will not be as lucky, however, as regards inflation.  We will have to pay for our relatively high growth rate (in comparison with our neighbors) with high inflation of at least another 4.5% (breaching the Central Bank target of less than 4.0%).  We shall also see our peso depreciating faster to the range of P52 to 53 as a result of larger trade deficits.  Over the medium term (next five to six years), the upside is the possibility of growing at 8 to 10% per annum in GDP if we manage to elect a President who can significantly reduce corruption and crony capitalism that divert billions of pesos of funds to less productive uses.  It is notable that The Economist recently ranked the Philippines fourth behind Russia, Malaysia and Singapore in the practice of crony capitalism.  In an article this month, The Economist commented that “crony sectors still account for four-fifths of total billionaire wealth in the Philippines.”  The Economist defined crony sectors as “a host of industries that are vulnerable to rent-seeking because of their proximity to the state, such as banking, casinos, defense, extractive industries and construction.”  I support the observation of The Economist that under President Rodrigo Duterte, a few favored businessmen close to the government have enjoyed more economic advantages than others. This has led to less competition and a non-optimal allocation of scarce financial resources and, therefore, slower growth.

          It cannot be denied, however, that even the less desirable growth of 6 to 7% will still be among the highest in the Indo-Pacific region in the coming five to six years.  That is why it is wise to consider the strong fundamentals of the Philippine economy (demographic dividend, strategic geographical location in the most dynamic economic region in the world today—the Indo-Pacific region—and vast natural resources, among others) as the main reasons for investing in the Philippines and to give only secondary importance to the results of the May 2022 elections.   Even the crony capitalism rampant during the Duterte Administration did not prevent economy from growing at 6 to 7% during pre-pandemic times.  Now that the economy is showing strong signs of recovery, the attention of people in business should be on which economic sectors will be most attractive financially for increased investments.

          An analysis of the growth performances of various sectors of the economy during the fourth quarter of 2021 may give us some clues about which sectors will recover faster than others in the coming quarters, semesters and years.  Most analysts were surprised with the robust growth of the last quarter of 2021 of 5.7% (formerly estimated at 5.6%) because there still high rates of infection of COVID-19, especially the Omicron variety.  Especially strong were the growth rates in Industry (9.5 %) and its sub-sectors:  Construction (18.5%), Mining and quarrying (7.9 %) and Manufacturing (7.2 %).  The construction boom can be expected to continue, despite fears that  in the long run the next Administration may be hard put to finance its Build, Build, Build program because of the huge debt burden it is inheriting from the Duterte Administration.  If we examine the list of the 111 big-ticket infrastructure projects approved by the NEDA board three months before the end of the present Administration, documents show that these approved projects worth a combined cost of PPh4.4 trillion are being financed by official development assistance (ODA) or low-interest concessional loans extended by multilateral banks as well as bilateral development partners.

          The biggest of these projects is the Php873.6 billion North-South Commuter Railway system Project connecting Mabalacat, Pampanga and Calamba, Laguna across a 147.3-kilometer rail system.  This project is being financed with fund coming from the Asian Development Bank and the Japan International Cooperation Agency (JICA).   Only thirteen of them worth some Php102.9 billion need local financing from the national budget.  A much bigger amount of PhP 757.7 billion is being sourced from the private sector through the public-private partnership (PPP) mode.  The largest of these is the San Miguel Corporation’s Php735.6 billion Bulacan International Airport.  The three other projects being supported by the private sector are Clark International Airport New Passenger Terminal Building, the Clark International Airport Expansion Project and the Davao Food Complex.  These are expected to contribute to the growth of the construction sector in the near term.  Over the medium-term, if the next Administration plays it card right, even bigger amounts will be spent through the PPP mode from foreign direct investors taking advantage of the newly amended Public Service Act by investing heavily in more airports, railways, subways, tollways, telecommunications, expressways and tollways.

          Already in the first quarter of 2022, the strong growth of manufacturing had been sustained.  As reported by the UK-based think tank Pantheon Management Macroeconomics, the Philippines’ PMI in March 2022 “was the star of the show among emerging markets in the ASEAN region.”  Also bullish about Philippine manufacturing was S&P Global whose economist Maryam Baluch commented that the Philippines’ PMI figure for March 2022 signaled an improvement in operating conditions, supported by output levels expanding for the second consecutive month.  In both output and orders, the expansions in the manufacturing sector were solid overall and above their respective long-run series averages.  There is strong evidence that the manufacturing sector in the first quarter of 2022 will replicate, if not improve, its robust performance during the last quarter of 2021.  Among the industries that grew the fastest during the first quarter of 2022 are coke and refined petroleum, food products, computer and electronics, chemicals furniture, non-metallic mineral products, machinery and equipment, and basic metals. As the economy opens up more in the second semester as restrictions pertaining to the pandemic reach zero level, the transition to the next Administration will see even brighter prospects for the whole industrial sector, including the mining sector that is enjoying high prices for its mineral products, especially nickel, copper, gold, and coal.  It is expected that whoever wins the Presidency, there will no return to the extremely restrictive anti-mining policies that prevailed during the Administration of President Nonoy Aquino.

          Except for the leading export item which is that of electronic and semi-conductor, the strong growth of manufacturing can be attributed to the recovering domestic demand for goods and services after the hiatus imposed by the long lockdowns during the pandemic.  It may be asked, however, if the higher rates of inflation expected in 2022 will dampen demand for consumer items and services.  In my view, consumer demand will continue to be strong, despite higher prices, because the two most important sources of purchasing power—OFW remittances and the BPO-IT sector—will benefit from higher incomes because of the depreciation of the peso to levels ranging from Php 52 to 53 for the whole year of 2022.  According to the latest forecast of the Central Bank, OFW remittances are expected to grow by 4 to 5% in 2022 and 2023.  These are very realistic expectations because even during the toughest of the pandemic years (2020) when our GDP declined by 9.1%, OFW remittances hardly declined at -0.8%.  Last year, OFW remittances reached a record high of $34.9 billion, of which $3.9 billion was sent through banks.  Even as the pandemic was raging during most of 2021, these remittances grew at 5.1% from 2020.  Over the past ten years, the average annual growth rate of these personal remittances was 5.7%.  If there is one strong awakening among the ageing countries of Europe and Northeast Asia during the pandemic, it was how valuable and indispensable are Filipino workers in their health, caregiving and other services sectors.  It is reasonable to expect that demand for OFWs will be at even higher levels in the coming years than before the pandemic. I am personal witness to how Japan and European countries like Germany and Austria are very active in preparing Filipino workers with language and other forms of training so that they can be employed in their respective countries.  To be continued.