Heading for economic bust after 2020?
before the Spanish Chamber of Commerce, Enrique Feàs, the economic and commercial counselor of Spain, accurately describes the factors standing in the way of the country’s long-term prospects for growth. His insights could not have been more on point. It confirms what most economists already know, but have swept under the rug so as not to dampen the atmosphere of optimism. It is government’s “dirty little secret,” if you will. million, went into new manufacturing plants. The lion’s share were attributed to inter-company debts (loans from foreign headquarters to their Philippine subsidiaries) at $3.347 billion, reinvested earning at $819 million, and a foreign investor’s purchase of equity in a local bank amounting to $1.321 billion. Sure, inter-company loans and reinvested earning also contribute to productivity, but they went towards expansion rather than new manufacturing facilities.
Despite Malacañang’s persistent denial, the Philippines remains the least preferred destination for FDIs principally because of the restrictive provision of the Constitution. Speaker Sonny Belmonte has been championing Constitutional amendments of economic laws for some years now with no support from Malacañang. Eco Cha-Cha will be heard on second reading this June. Again, perhaps for the last time, President Aquino has the opportunity to leave a lasting legacy of genuine reform if he supports this bill.
As for public spending, government spent $12.95 billion on public infrastructure last year. This does not count the $3.22 billion worth of projects awarded for nine PPP (Public-Private Partnership) projects. While it is a massive improvement to the $3.75 billion GMA spent in 2010, sadly, it is still not enough. Even government’s intended $15 billion infrastructure budget next year will fall short. Truth is, we need to spend about $25 billion annually if only to put our capital formation ratio at the same level as, say, Vietnam.
The good news is that the country has enough fiscal space to invest more. Government has been so prudent with the country’s finances that we now have one of the lowest public debt ratios in the region. Ours stand at 37.2 percent while Thailand and Vietnam are at 47.2 percent and Malaysia is at 57 percent. In addition, our current account balance is at 4.6 percent of GDP, a far cry from Indonesia’s deficit of three percent.
What these numbers say is that we can borrow as much as $8 to $10 billion for infrastructure without compromising the impeccable state of our finances. It is a worthwhile investment in our future. The next administration will be foolhardy not to utilize this resource.
The IT-BPO industry has been a godsend to us in that it has absorbed more than a million of our new graduates who would have otherwise been unemployed or working in the agricultural or informal sectors. Over the last 12 years, it has evolved to be the country’s third largest source of foreign exchange, pumping in $15.3 billion to our coffers.
But the reality is that 66 percent of the industry is still dedicated to contact centers—the lowest rung of the IT-BPO totem pole in terms of revenue yield. We have yet to develop greater market penetration in higher paying competencies such as software development, transcription, and engineering process outsourcing. It should be all about value added or attaining the highest possible income for each worker in the industry. As income rises, poverty declines.
Unfortunately, the industry seems to have lulled itself into complacency after having attained market leadership in voice-based BPOs. Not enough is being done to climb the technology chain, save for software development, which is growing apace. By the year 2020, the minuscule incomes of call center agents, however plenty, will not be enough to sustain seven percent growth.
The same is happening with our manufacturing industries. Merchandise export trends show that the share of manufactured goods like electronics and semiconductors have declined in the last 10 years. In contrast, the share of basic agricultural products and basic minerals have increased. So instead of integrating forward towards manufacturing more sophisticated products with higher value added, our export mix is regressing to basic commodities. It is reverse industrialization. This is a cause for worry.
The incoming President will have his (or her) job cut out for him/her. One thing is for sure, my vote will go to whoever has a clear and reasonable policy towards industrialization, FDIs, and bridging the infrastructure gap. Andrew is an economist, political analyst and businessman. He is a 20-year veteran in the hospitality and tourism industry. For comments and reactions, e-mail andrew_rs6@yahoo. com. More of his business updates are available via his Facebook page (Andrew J. Masigan). Follow Andrew on Twitter @aj_masigan.