Bernardo M. Villegas
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PH Glass More Than Half-Filled (Part 1)

          It is always heartening to meet with my friend, Jim Walker, Head of Hong Kong-based think tank Asianomics, which monitors very closely all the Asian economies.  I have always counted on him for a very independent view of the Philippine economy as a means of moderating my incorrigible optimism about the prospects facing businesses operating in the Philippines.  In my last conversation with him, I came out with the more balanced view that, while there are serious threats to our economy in the coming twelve to eighteen months, the Philippine glass is still more than half filled. Having survived the Great Recession of the last decade or so, we can avoid some of the worst consequences of current global developments like high oil prices, the trade war precipitated by the America First policy of President Donald Trump, the end of easy money all over the world and the uncertainties of the BREXIT rollout.  Let me share with my readers a summary of Asianomics’ latest report on the Philippine economy entitled creatively as “Philippines:  BBB, POGO and TRAINS (Spotlight on growth—not return).” 

         First, Jim assesses objectively the recent past of Philippine economic performance:  “Since 2011, which are the top three countries in Asia in terms of average real GDP growth per annum?  Most pundits would probably guess the top two—China and India—but how many would put the Philippines in at number three?  Asia’s former ‘sick man’ has made a formidable recovery since the end of the Global Financial Crisis.  Undoubtedly, many would cite President Noynoy Aquino as the architect of Philippine outperformance and, during his tenure, confidence and governance undoubtedly improved spectacularly.  But despite his negative Western-press profile, President Rodrigo Duterte has added to the growth momentum he inherited.  His Build, Build, Build program and Tax Reform Acceleration and Inclusion policy are aimed at taking Philippines growth into the 7-8% range, the same as regional leader India.  We would not bet against him achieving his goals.”  

         I am glad an independent view has confirmed what I have been telling business people that it would not be overly optimistic to expect our GDP growth to accelerate to the range of 7-8% in the next three to five years.  With the traditional engines of growth such as the OFW remittances, the BPO-IT earnings, the increasing investments in manufacturing which is now growing faster than services, the sustained though still low increase in Foreign Direct Investments, the growing middle class which is stimulating domestic tourism of more than 50 million Filipinos discovering their own country, we can reasonably expect the continuation of at least a 6 to 7 percent GDP growth rate.  If we add to these engines the boom in infrastructure spending coming from the BBB Program, it is not too much to expect an additional one to two percentage points to our GDP growth.  India—with its own problems of corruption and chaotic politics—has grown at 8 percent for more than a decade.  Myanmar, Cambodia and Laos have been registering 8 percent growth rates for a number of years.  Of course, people will say that these countries are growing from a low base.  But so are we!

         Not one to stay at the level of generalizations, Jim presents hard evidence about the improvements in the economic fundamentals of the Philippines.  In one of the graphs accompany his report, he presents a picture that few regional analysts and economists in the 1990s would ever have thought they would see:  a five-year period where Philippines investment growth would outstrip the other major economies in the ASEAN.  Through 2016 and 2017 when most of the region was taking a breather, Philippines investment rates were roaring ahead (a little too much in his opinion).  The combination of increased government infrastructure spending and private sector confidence underpinned the expansion.  This surge in investment has addressed a long-time weakness of the Philippine economy. While more of our East Asian neighbors were spending 30% or over of GDP in investments, our figure was a paltry 20% or even less for a long time. Now our investment to GDP rate is approximating 30%.  With the BBB Program, it is highly possible that our investment to GDP rate will exceed the 30% mark, backed up by an equally high domestic savings rate. 

         Jim also presented a sanguine view of Philippine exports over the last five to six years.  While overall Asian exports languished from mid-2011 until 2015, Philippine export growth was relatively rapid, even if volatile.  The Philippines, however, was not spared the export slowdown together with the rest of the region in 2015.  Surprisingly the Philippines made an even more impressive recovery in export until the middle of 2017.  Since then Asian and Philippines’ export trends have diverged, with the latter slowing down, partly explained by the appreciation of the peso during a five-year period in comparison with the currencies of its ASEAN neighbors, especially Indonesia, Thailand and Vietnam. In fact, in my opinion, the recent faster depreciation of the Philippine peso in relation to other ASEAN currencies may actually be a boon to Philippine exports, not to mention the improved purchasing power of the relatives of the 10 million OFWs who receive close to $30 billion in annual remittances. Jim rightly observed that higher imports resulting from the BBB program under the Duterte administration is mainly responsible for the peso being under further pressure. High imports of capital goods augur well for productivity increases in the future.

         Jim also has a very positive view of the accomplishments of our fiscal managers in controlling the debt-to-GDP ratio and the fiscal deficit.  To quote him: “One of the main reasons that we went overweight in 2012 was that it (the fiscal position) had been incredibly well-managed since the mid-1980s.  Overall the government debt position is just 45% of GDP (net, 35%) and government deficits have been well-contained below 3% of GDP.  The current government intends to increase the deficit to 3%, but no further.”  Even the current fears of the Secretary of Budget and Management that the recent decision of the Supreme Court ordering the national government to release a much bigger share of the national budget to the Local Government Units may be unwarranted if there is the political will of the national government to devolve a good share of the spending on rural infrastructures, public education, and health to the regional governments.  To my mind, there is already a critical mass of enlightened, competent and honest LGU heads who can be relied upon to spend wisely their Internal Revenue Allotment (IRA) share.  Under the Local Government Code of 1991, LGU units can partner with the private sector in making the necessary investments to improve the rural infrastructures as well as the quality of public education and public health.  In this way, the increased amounts of the IRA that will be released by the National Government to comply with the Supreme Court decision for a greater share of LGUs in the IRA can just be deducted from the national budget so that there need not be an increase in the fiscal deficit from 3 to 6%.  It is too pessimistic a position of some members of the Cabinet to opine that LGU heads can only thinking of investing money in “basketball courts and waiting sheds.”  I am personally working with some of these enlightened, competent, and honest LGU officials who are planning to partner with the private sector in building railways, regional airports, seaports, tollways, public markets, government centers, public school buildings, water systems, mini-dams, etc.

         Jim also thinks highly of the Government external debt position:  “…There are absolutely no worries surrounding the Philippines’ external debt position.  Short-term external debt amounts to just $12 billion, 17.6% of foreign exchange reserves.  Moreover….as Philippines growth expressed in U.S. dollar terms (i.e., adjusted for peso depreciation) has slowed, the amount of external debt outstanding has fallen by over US$6 billion.  This makes us comfortable about the ability of debt holders to service their outstanding (and falling) commitments. ...In other words, the Philippines is in a good position to ramp up public expenditure if it wishes to and this is certainly the object of the BBB and TRAIN policies.”  Jim has also observed the appearance of the so-called “hybrid model” approach to domestic infrastructure development which relies more heavily on official development assistance (ODA) than the private-public (PPP) scheme started during the Aquino Administration.  He was quick, however, to point out the wisdom of not relying too heavily on Chinese ODA: “It has attempted to enlist the help of China and Japan in particular in various road, rail and air projects around the country.  In the latest news stories, Chinese sign-off on infrastructure projects seems to be much slower than Japanese agreements and, as a result the government is shifting focus to Japanese funding.  Korea is also in the picture.”  And may I add, investments from Taiwan—both public and private—will increasingly compete with Chinese funding.  (To be continued).