Optimism despite huge challenges

In June, Bangko Sentral ng Pilipinas (BSP) Gov. Benjamin Diokno made the pronouncement that the Philippine economy has entered a so-called “Goldilocks” growth phase, one characterized by high economic growth and low inflation.

Just like in the eponymous fairytale, the analogy to the metaphorical porridge means finding just the right heat to power a strong growth trajectory with consumer prices remaining relatively stable.

In the past seven years, the economy has grown at a rate of above six percent, making it one of Asia’s fastest-growing economies.

Inflation, meanwhile, stabilized to 2.7 percent in June after reaching record highs last year, as growth in food and transportation prices slowed. This was the slowest growth in the headline inflation rate in the past year or so, bringing the year-to-date average to 3.4 percent, well within the government target range.

Despite the temporary growth slowdown in the first quarter of the year as a result of the delay in the enactment of the national budget, economic managers and markets continue to be optimistic about domestic growth prospects.

The country’s gross domestic product (GDP) slowed to a four-year low of 5.6 percent in the first quarter of the year as government spending for infrastructure and crucial programs were held back. A contraction in public construction and government spending was seen during the period.

Immediately after the passage of the national budget in April, economic managers announced a catch-up plan for spending on infrastructure spending to get more projects off the ground.

Now, hopes are pinned on how well the

government can spend for stalled projects to stimulate the economy.

Rabboni Francis Arjonillo, president of First Metro Investment Corp. (FMIC), described the growth slowdown in the first quarter of the year as a “blip” that the economy can recover from through the government’s aggressive catch up plan, falling inflation, and loosening monetary policy.

This is because economic activity is still largely driven by robust consumer spending as supported by rising incomes and strong remittance inflows.

FMIC chairman Francisco Sebastian, meanwhile, believes this Goldilocks economy growth phase is also favorable to capital markets as present conditions are attractive to investors.

“It’s the best economy for capital markets; it’s the friendliest economy that develops capital markets. When the economy grows at a steady growth, asset prices go up steadily. Of course on the inflation side, inflation rates are stable, monetary policy is investor-friendly so we have an economy that is good for investors,” he said.

But is it sustainable in the medium to long-term?

MODEST GROWTH

Economist Calixto Chikiamco believes that with its current capacity and deficiencies, the Philippine economy can only grow at a maximum of six percent or so and not the seven to eight percent expected by economic managers.

This is because there is still a huge infrastructure gap that needs to be bridged as well as a persistent weakness in the agriculture and manufacturing sectors that pose a threat to consumer prices.

For Chikiamco, maintaining this favorable economic condition requires a steady commitment to the government’s infrastructure program, as well as implementing policies that will enable the country to attract more investments in sectors that can supply demand and create more jobs.

In the absence of good infrastructure, increased economic activity will only lead to bottlenecks and inflation.

The continued neglect of the agriculture and manufacturing sector will eventually manifest again in high inflation as importation is continually used to fill supply gaps and keep prices stable.

“We are basing our growth on services alone, which isn’t sustainable. Both inflation and a foreign exchange crisis will result if investment in manufacturing and agriculture is not boosted by creating a climate favorable for investments in those sectors,” said Chikiamco.

“This lack of domestic production capacity shows up in the ballooning trade and current account deficits. In other words, increased domestic demand just leads to more imports as domestic production capacity is limited. For example, cement, rice, meat, fish are imported to keep inflation low. The root cause of weak domestic production capacity is poor investment in manufacturing and agriculture,” he added.

To facilitate the flow of investments in these sectors, Chikiamco said there is a need to ease restrictions on foreign investments and to modernize the labor code to remove rigidities and respond to the needs of labor-intensive industries.

The agriculture sector, he said, would also benefit from the removal of the five-hectare

ownership limitation set under the Comprehensive Agrarian Reform Law as larger farms can be established for crops and products requiring economies of scale.

“Also, growth in services cannot reduce poverty. Manufacturing still has higher productivity than services and has the good-paying jobs. Also, most of the poor live in rural areas where they make a living out of agriculture,” said Chikiamco. “Unless we can increase the productivity of our farms, incomes in the rural areas will remain depressed.”

Besides, the services sector has several hurdles of its own such as the volatility of jobs overseas and the threat of artificial intelligence.

As such, the changing landscape of the Business Process Outsourcing (BPO) industry also necessitates higher skill sets among Filipino workers.

“The BPO industry has to upskill its workforce but is finding a shortage of people with the right skills. We still need to improve our educational system,” said Chikiamco.

MOVING FORWARD

As a result of the low economic output in the first quarter, one of the country’s largest development partners, the Asian Development Bank (ADB), trimmed its growth forecast for the Philippines to 6.2 per cent this year from its earlier estimate of 6.7 percent.

It noted, however, that government spending is expected to pick up in the second half of the year following the enactment of the budget in April as more projects come on stream, therefore fueling growth.

“We agree with the ADB. These are huge challenges but we are optimistic,” said Rosemarie Edillon, Undersecretary of the National Economic and Development Authority (NEDA).

In its last meeting, the inter-agency Development Budget Coordination Committee (DBCC) maintained its economic growth target for the year at six to seven per cent in 2019, 6.5 to 7.5 per cent in 2020, and seven to eight per cent in 2021 and 2022.

Meanwhile, it slashed its 2019 inflation forecast to a range of 2.7 percent to 3.5 percent from the previous assumption of three to four percent.

The DBCC also said the proposed 2020 national budget, which will be submitted to Congress within 30 days of its opening, will continue to program expenditure public infrastructure and social services, while funding the priority programs of the administration such as the Bangsamoro Organic Law, the Universal Healthcare Law, the institutionalization of the Pantawid Pamilyang Pilipino Program (4Ps), among other measures to promote economic and human capital development.

As the government forges ahead with its ambitious infrastructure program, Chikiamco said the government should again consider pursuing projects though the PublicPrivate Partnership (PPP) route.

“Lack of financing from official development assistance shouldn’t be a constraint. If the government pivots to PPP, there will be plenty of takers,” said Chikiamco. “Private investors can take up the slack from ODA.”

Chikiamco said the government should make the most out of the wave of reforms to promote sustainability in the economy.

“If there is a window for reforms to make the Goldilocks economy sustainable, it should be in the next year or so. Otherwise, politicians will be focusing on the 2022 elections rather than on reforms,” he said.