Bernardo M. Villegas
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The Philippines in World Economy (Part 2)

          The Philippine economy can sustain a GDP growth of 6 to 7 percent in 2018 on the bases of the following engines of growth:  a young, growing and English speaking population; the BPO-IT industry that may be slowing down but can still grow at single-digit rates delivering more than $25 billion in revenues and employing some 1.2 million well paid workers; OFW remittances that can continue to grow at its average over the last ten years which is between to 3 to 5% annually, bringing total remittances to more than $30 billion for the whole year; the resurgence of manufacturing which is now growing faster than services; a buoyant domestic tourism sector that will see some 60 million Filipinos discovering the tourist attractions in their own country; and the real estate sector in which medium-priced housing units and office  buildings will continue to be built to meet increasing demands.  These leading sectors will sustain growth that will be both consumption- and investment-led.  In fact, investment spending is already growing faster than consumption spending, a good sign for long-term economic growth.

         As is already happening in the less developed members of the ASEAN Economic Community, like Myanmar, Laos and Cambodia, our growth can accelerate to 8 per cent or more if the Government succeeds in implementing the Build Build Build program through an effective execution of its own infrastructure projects, especially in the countryside, that are already getting a much larger share of the government budget at 6 per cent of GDP.  The building of farm-to-market roads, irrigation facilities (which are being provided free to the small farmers), and post-harvest facilities is generating a lot of employment in the countryside as well as addressing the needs of the poorest of the poor, the Filipino farmers.  Together with increased shares of social and economic services in the annual budget, especially focused on improving the quality of basic education for the children of the poor and the delivery of public health services to them, economic growth is finally trickling down to poor households which still constitute more than 20 percent of the population.

         The 8% growth of GDP will also be made possible by a renewed emphasis on getting the private sector to participate in the building of urban infrastructures such as tollways, airports, railways, skyways, etc. through the Public Private Partnership (PPP) mode.  I am happy to note a change of mind among our government officials about their focusing on the so-called hybrid model in which infrastructure projects are initiated by the Government and funded by Official Development Assistance (ODA).  I supported the opinion of some business leaders that this hybrid model would not speed up the construction of infrastructures.  It is a no brainer that the Government is not an effective initiator of projects and that ODA funding involves too many complications.  I am heartened to observe that in the last few weeks, there have been numerous unsolicited proposals coming from private enterprises to build airports, railways, tollways and other urban infrastructures (both at the level of the national government and at the LGU level).  Together with the Swiss challenge, I find the PPP approach a more transparent process, compared to the bidding of projects done by the DPWH which unfortunately is still struggling to contain corruption at the regional levels.

         Another major source of the additional one or two percentage points in GDP growth can come from an acceleration in the increase of Foreign Direct Investments (FDIs).  Although there is reason to rejoice that in 2017, FDIs in the Philippines finally broke the $10 billion mark, attaining an annual growth of 21.4%, we have to point out that our peer countries like Indonesia and Vietnam, have been averaging more than $10 billion for many years in a row, as we were still struggling to reach that target because of numerous restrictions against foreign direct investments contained in our very Constitution.  If only Congress can focus their efforts in removing these restrictions by amending the relevant provisions in the Constitution (instead of wasting time on the issue of federalization which we need like a hole in the head), together with the Build Build Build efforts we will see much larger inflows of FDIs (especially in manufacturing, construction, and public utilities) that will make even a 10% GDP growth possible before the term of President Duterte is over.

         Among the top foreign direct investors in 2017 were Singapore, Japan and Hong Kong.  We should continue to focus our efforts in attracting investments from our Northeast and Southeast Asia neighbors, including Taiwan and South Korea.   Especially in manufacturing, construction and public utilities, these tiger economies can do much to help us catch up in becoming a First World Country in the next twenty years because they have much to contribute in technology, management experience and funding, having attained First World status only in the last twenty to thirty years.  I would not rely too heavily on Chinese technology and funding in our Build Build Build program because there is enough evidence that the Chinese have not delivered in their promises to help in other countries, such as those in Africa and other parts of Asia.   Without completely ignoring the offers of Chinese participation in our industrialization plans, I would balance their presence here with those especially of the Japanese, the Taiwanese, the South Koreans and the Indians (as in the case of the building of the first class airport terminal in Mactan, Cebu in partnership with Megawide that is now eyeing four more airport terminals in various regions of the Philippines).  As another example of limiting our reliance on the Chinese for vital infrastructures, I would prefer to see a Japanese firm bag the third telecom company in partnership with a Filipino enterprise.

         To satisfy the need of business people for a short-term forecast of macroeconomic variables for the year 2018, let me summarize here my expectations concerning the financial sector.  Inflation will range from 3.5 to 4.5% during the year.  I have complete confidence in the ability of our Central Bank authorities to use their expertise in inflation targeting which has been honed for at least two decades now to keep inflation under control below the maximum of 4.5%.  For the same reason, I expect the Central Bank to manage the foreign exchange depreciation so that the rate will not exceed P52.50 by the end of the year.  We still have sufficient foreign reserves (about 9 months of import coverage) to enable this expert management of the foreign currency.  As my UA&P colleague, Dr. Victor Abola, has forecasted together with the financial experts of the First Metrobank Investment Corporation, 91-day T-bill rate will be at 2.5% and 10-year T-bond rate at 5.15% by the end of 2018.   GDP will grow at 7.1% with the Industry sector growing faster than the Services Sector (8.7% vs. 7.1%).  The laggard will be as usual the much neglected and maltreated agricultural sector.  If the Duterte government is able to sort out the mess in the agrarian reform sector by allowing the small farmers to consolidate their farms into bigger units through cooperatives, corporatives or the nucleus estate system made famous by the Malaysians, before the Duterte term is over, we may see agribusiness (high-value crops in addition to bananas and pineapple such as cacao, coffee, palm oil , mangoes, avocados, etc.) also becoming an engine of growth as has happened among our ASEAN neighbors like Thailand, Vietnam and Malaysia.  For comments, my email address is