FINDING THE NEXT LEGS OF THE ECONOMY
All is not well with the economy and I am compelled to sound the alarm on imminent risks. Fact is, the country’s four major dollar earners are all on a downward trend and this has caused the country to register unprecedented current account deficits (dollar shortfalls in our monetary transactions with the world). Without new dollar earners, we will be left with no recourse but to finance this deficit with debts — debts we will be hard-pressed to pay in years to come.
Exports have been on a steady decline due to the double whammy of softening global markets and our inability to attract enough foreign investments in the manufacturing-export sector to compensate for it. The BPO industry is softening as well with growth decelerating from 17% for the period covering 2012- 2016 to only 8% from 2017 to 2018. This is due to artificial intelligence replacing voice-based BPO services and less BPO firms coming into the Philippines. Even the manufacturing sector is decelerating from double-digit growth to just 5.6% in the second quarter of the year.
As for our ever-reliable source of foreign exchange revenues, OFW remittance, it too is decelerating. From an average growth of 7.9% from 2013 to 2015, it has slowed to just 3.9% in the last three years. The repatriation of thousands of OFWs from the Middle East this year will further erode revenues.
The abovementioned sectors are considered the “legs” of the economy. They are the dollar earners and job generators that keep the country afloat. The fact that they are all trending downward should worry us all, especially since it is happening at a time when our imports are growing at double-digit rates. As I said, if no new dollar-earning industries are developed, we will have no choice but to finance this deficit with debt.
It is already happening. The Department of Finance recently announced its plan to borrow a whopping $22.4 billion to finance its spending plan for 2019. This is on top of the $16.75 it is borrowing this year. Public debt will likely top $165 billion by the end of 2019, a far cry from just $115.6 billion when President Duterte assumed office.
As far as our trade gap (exports minus imports) is concerned, it has already ballooned to $26 billion as of the end of August, 64% higher than it was in the same period last year. Our current account is seen to post a deficit of $9.8 billion by yearend, three times larger than BSP’s targets.
INDUSTRIAL LEGACIES
Each administration has left the country with an industrial legacy. The Ramos administration developed the electronics industry, the Arroyo administration saw the rapid expansion of the BPO industry, and the Aquino administration fostered the age of manufacturing resurgence and infrastructure development through PPP.
For its part, the Duterte administration is banking on infrastructure development to drive the economy. This is a problem. Infrastructure development, by itself, is only an enabler of economic productivity, not a driver of it. Granted, infrastructure development will ignite growth through increased public spending and job creation while infrastructure projects are being constructed, but they yield no DIRECT economic benefits once the projects are completed.
The Duterte administration needs to develop new industries to balance the budget and drive economic growth for the medium to long term.
Some argue that shipbuilding, chemicals, machinery and computers, and mineral product are poised to be the next legs of the economy. Problem is, none of these industries have the potential to compete, head to head, with the top-tier manufacturers in their field. For instance, it would be a stretch to think that the Philippines could compete with Germany, China or Japan in chemicals. Neither can we compete with the US in machinery and computers.
We need to develop industries where we can be the global leader, if not a credible challenger.
POTENTIAL LEGS
After much thought and consultation, I put forward three industries which I believe have the potential to be the economy’s new legs. They are tourism, agroindustrial manufacturing, and multimedia content.
Let’s talk about tourism first. Tourism is a low-hanging fruit, given the pent-up demand for inbound travel to the Philippines. To be a tourism powerhouse requires two essentials — infrastructure and absorption capacity. The latter refers to having enough lodging and dining options, tour operators, transport operators, retail establishments, and the like.
The good news is that the government is already addressing the infrastructure backlog in the tourism sector. Soon to join the newly inaugurated airports in Mactan, Lagundian, Puerto Princesa, and Iloilo are new international gateways in Clark (the new terminal), Panglao, and Bacolod. In terms of road connectivity, the DPWH is now
constructing 6,480 kilometers of roads within 49 tourism clusters across the country.
Foreign visitors will likely surpass the 7.4 million target this year and onwards to 12 million by 2022. But we should not be content with this. Lessons can be learned from Japan which has increased inward travel by 333% from 2011 to 2017. The quantum leap was achieved by relaxing visa requirements, aggressive expansion of aviation route networks and expansion of absorption capacities. Japan will welcome 40 million visitors by 2020.
For those unaware, agro-industrial manufacturing involves the processing of agricultural products into finished goods with higher value-added. This could come in the form of readyto-eat products; canned, boxed or bottled consumables; cooking ingredients; and frozen/dehydrated produce. Agro-industries do not require high technology. Its competitive and differential advantage lies in the indigenous raw material used. Products using raw materials derived from marine sources, coconuts, sugarcane, and tropical fruits are potential export winners for the Philippines.
The Philippines exported $4.7 billion worth of processed food in 2017 while Thailand exported $33.11 billion. Considering that both nations possess similar indigenous products, the disparity in export numbers gives us an idea of the size of the market and how much we are losing out. The opportunities are enormous.
To succeed in this field requires close collaboration between the government and the private sector. For its part, the government must drive down the cost of agricultural and marine products and interisland shipping. In addition (and this often overlooked), government must also provide local producers with access to high-quality, affordable, quarantine-compliant packaging materials.
In other words, government must make it more profitable for the private sector to manufacture food products rather than simply importing them.
On the private sector’s part, those involved in agro-industries must work smart. Knowing that it will take time (if at all) for local produce and logistic cost to become as cheap as they are in Thailand, our producers must focus on areas in which they can derive a variety or quality advantage.
I am reminded of Spain and how it has been in stiff competition with Italy and Greece in the exportation of olive oil and canned tomatoes back in the ’60s and ’70s. Its solution, to promote products that are uniquely Spanish such as chorizos, jamón, canned cocido and the like. The fact that Spain exports more than $90 billion worth of food products is proof of the strategy’s success. In other words, since it was hard-pressed to compete in one category, it created new ones. This is what I mean by working smart.
Multimedia content is an entirely new field which I think is not even in the radar of the Department of Trade and Industry. Multimedia content involves the exportation of pop music, movies and television. Korea is a supreme example of a nation that succeeded in the pop music field. India has succeeded in cinema while Mexico is the challenger to the United States in as far as television content is concerned.
There is no denying the Filipino’s natural inclination for the arts. The fact that Filipinos are the mainstay entertainers in almost every hotel and cruise ship around the world is testament to this. Harnessing this talent and marketing it to a global audience could prove to be a lucrative dollar earner for the Philippines, as K-Pop, Bollywood and Telemundo are to their base countries.
To succeed in multimedia requires many levels of collaboration from both the government and private sector. Due to its complexity, I will save that discussion for another piece. Suffice it to say that multimedia is an area we can exploit.
In summary, the Philippines can succeed in tourism, agro-industrial manufacturing and multimedia content because there exists a convergence of talent and inherent competitive advantages. These inherent competitive advantage come in the form of the natural beauty of our landscapes, the fruits of our land and seas as well as our unique culture which is a mix of Asian, Hispanic and American.
The Duterte administration must seriously think about the state of our finances and its industrial legacy. Without new industries in development, its only legacy will be a mountain of debt.