The Philippines in world economy

(Part I)

As the US economy seems to be headed towards autarky or a protectionist environment being fostered by President Donald Trump, the Philippine economy is slowly discarding its protectionist past and recognizing its inevitable trade and investment links with the rest of the world. Important measures still have to be implemented to complete the transformation into a truly globally oriented economy, such as the shortening of the negative list of industries in which foreign investments are restricted or the amendment of the Philippine Constitution to remove the provisions limiting foreign direct investments. The economic team under President Duterte is committed to opening up the Philippines more and more to the world markets. This would require the private business sector to increasingly think global, while acting local.

It is no longer adequate to just focus on domestic developments in the economy to forecast the environment that will be faced by Philippine business in the near or medium term. Attempts must be made to anticipate critical events in the global scene and to assess the impacts of these global developments on such important economic variables as domestic interest rates, the peso-dollar rate, the foreign markets for Philippine exports, the prices of commodities that are imported by domestic business, etc. Thus, in order to arrive at a reasonably accurate forecasts for the year 2018 in the domestic economy, we have to consult what experts are saying about future economic trends all over the world.

Whether we like it or not, we have to recognize that the US economy still has a significant impact on our economy. Fortunately, at least for the next six to 12 months, the US economy is showing signs of strong growth in income and employment. US GDP is anticipated to grow at 3.5 to 4.0% in 2018, a strong recovery from the anaemic rates of the past decade or so.

There is, however, a shadow of uncertainty that can threaten this bullish environment: The trade war that the US is waging against China and other major economies, with the exception of its North American neighbors. Any short-term gain that the US may obtain from raising tariff walls against imports from its trading partners will be annulled by the slowdown in the world economy that a trade war will precipitate.

To prepare for such an eventuality, Philippine business will have to follow the lead contained in President Duterte’s rebalancing of our economic relations. We have to intensify our efforts to attract more investments from such Northeast Asian neighbors as Japan, South Korea, Taiwan, and Hong Kong as well as our fellow members from the ASEAN Economic Community. It is a good sign that intra-ASEAN trade has been growing faster in the last few years than our trade with the rest of the world.

In the energy sector, the recent climb of international oil prices to over $70 per barrel has been fortunately reversed when the US shale oil sector responded to the high price by producing record amounts of this substitute to petroleum, bringing back world prices to the $60 level. We need not fret that our domestic inflation will be fueled by higher oil prices since it has been proved once again that every time world prices go much beyond the $50 to $60 a barrel level, the US shale oil industry will react by increasing its production. I would worry more about the expected increase in interest rates in the US as newly installed US Federal Reserve Governor Jan Powell will respond to the overheating of markets by raising US interest rates at least two, if not three times, in the current year.

These moves would attract a lot of hot money back to the US capital markets and would serve to deflate stock markets in the Philippines and other emerging markets. At the same time, the Philippine peso will continue to depreciate. Fortunately, the Philippines financial system has enough foreign exchange reserves (still representing some 9 months of import coverage) to enable our Central Bank authorities to manage the currency so as to limit the depreciation. Together with some of my colleagues at the University of Asia and the Pacific, I do not foresee the exchange rate going beyond R52.50 to $1 by the end of 2018. This slight depreciation will be good for the competitiveness of our exports and for the relatives of the OFWs who will get more pesos for every dollar remitted to them.

The Eurozone, a major trading partner of the Philippines, has recovered definitively from the Great Recession of the last decade or so.

In 2017, it registered at 2.5% the fastest growth in a decade, compared to 2.3% in the US and 1.8% in the UK. There are worries, however, that in the medium term an extreme form of Brexit may cause a serious slowdown in the growth of the Eurozone.

This would impact negatively on our exports because the EU is one of our major trading partners. We have no alternative but to monitor very closely the way the British authorities will manage their exit from the EU.

We must have contingency plans to increase our exports to our Asian neighbors, especially China, Japan, South Korea, Taiwan and Hong Kong, not to mention the ASEAN Economic Community. Over the medium term, there must be efforts to have closer economic ties with the Middle East, Latin America and Africa.

We must find some ways of benefiting from the recent attempt to counter the anti-trade policies of President Trump with the resurrecting of the Trans Pacific Partnership (TPP) initiative in a modified form that was crafted in Chile.

The Philippines is fortunate for being considered an attractive investment destination among other so-called emerging markets that will lead the world by growing at an averageof 5 to 6% in GDP, compared with the global growth average of 3%. Together with Indonesia and Vietnam, the Philippines is especially endowed with a young and growing population that is an antidote to the ageing labor force of most developed countries all over the world.

To take full advantage of this young, growing and English-speaking population, the Philippines has to do its best to increase investments (both public and private) and the quality of education at all levels. We have to be especially conscious of using our scarce capital more productively as the whole world will see the end of easy money in the coming years. All over the developed world, interest rates will be rising We should expect more volatility in financial markets with the end of easy money. (To be continued)

For comments, my email address is bernardo.villegas@uap.asia.