Years of underinvestment to cap Phl recovery – ING
Dutch financial giant ING has warned that underinvestment over the past years could prolong the scarring impact of the COVID-19 pandemic on the Philippine economy.
ING senior economist Nicholas Mapa said the lack of investment outlays amid the strong rebound from the impact of the global health crisis could put a drag on the recovery.
“The lack of investment outlays even during this current rebound will unfortunately act as a cap on the overall growth outlook to come,” he said.
Underinvestment will likely continue as Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. signaled a higher for longer interest rate environment and even another possible rate hike, the economist said.
“With the BSP governor warning that the brunt of the impact from rate hikes has yet to come, we can expect underinvestment to continue for a bit longer,” Mapa said.
The country’s gross domestic product (GDP) growth slowed to 5.6 percent in 2023 from 7.6 percent, missing the six to seven percent target penned by economic managers through the Development Budget Coordination Committee (DBCC).
“The latest GDP growth print of 5.6 percent was a welcome development as it showed the resilience of households to lift growth close to, but ultimately short of the official growth target of six to seven percent,” Mapa said.
According to Mapa, government outlays also came to the fore, helping support growth in select quarters while public construction powered overall construction activity as private construction remained subdued.
However, he said the missing link in the equation was capital formation, which remains in expansion but has largely been absent in this recent run of growth.
“At the height of the pandemic, there was much concern about the underinvestment and the lack of capacity-building taking place as the economy and the greater population remained stuck at home,” Mapa said.
Years later, the relatively good growth numbers appear to have convinced some to gloss over the still subdued pace of capital formation as investment activity feels the heat from the BSP’s aggressive policy tightening.
To tame inflation and stabilize the peso, the BSP Monetary Board has raised key policy rates by 450 basis points since May 2022, resulting in higher borrowing costs.
Mapa said elevated interest rates continue to dampen overall investment activity.
“With the fiscal authorities working to address supply side issues, we could see the BSP finally changing its tune to support growth not just in the near term, but also for the medium term,” he said.
A realization that costly rate hikes have limited ability to address supply-side inflation may finally convince the BSP to conduct its own pivot soon after the US Federal Reserve conducts its own.
“This would allow more investments to flow into agriculture and the food supply chain, a move that will likely be more effective in ensuring food security and lower food prices,” Mapa said. “Meanwhile, a more affordable rate environment could also foster structural reform in infrastructure that would bring down the cost of doing business and expand our capacity further.”