Strong growth threatened by typhoons, ‘pork’ scandals, global slowdown
First of three parts
The major growth metrics are all still pointing upward, despite a slight hiccup in domestic production in the first quarter. Undeniably, the Philippines has achieved significant economic growth and a fair degree of political stability under the Aquino Administration.
Outside the realm of political debate over the performance of the government of President Benigno Aquino 3rd since he took over its reins four years ago, the economy seems to follow a trajectory of its own. The rapid expansion in gross domestic product (GDP) at an average above 6 percent has been acknowledged not just by the Aquino bashers but caught the attention of global investors. With inflation at between 4 and 5 percent looking benign, the analytics easily pointed to a smooth growth track two years down the road until the end of Aquino’s term in 2016.
A vibrant economy, along with the prospect of peace in Muslim Mindanao with the pending enactment of the Bangsamoro pact, was set to be Aquino’s two-tiered crowning glory, even if he were to exit ungraciously as a vilified political leader.
But the winds of disasters both natural and political, one after another, have come barreling their way into the economic scene—from typhoons to high-profile corruption-related scandals and a global growth slowdown—threatening to drive the achievements of Aquino’s government near a slippery slope. Any further misstep in governance, a natural calamity or fallout from an external crisis could easily drive the local economy downhill.
Before Aquino’s economic team could map out a plan to make the GDP numbers work for the poor, the combined impact of Super Typhoon Yolanda and the outbreak of the Priority Development Assistance Fund (PDAF) controversy last year inflicted grave damage on the lives of many Filipinos.
The allegations of plunder leveled against the most well-known senators based on revelations made by the whistleblowers at the Senate inquiry have sent shock waves to the foundations of people’s faith in all branches of government.
The economy, by its sheer growth momentum from previous years, withstood the first tremors from the controversy. But toward the middle of this year, the aftershocks grew bigger on the back of new discoveries of public fund misuse on a grander scale—billions of pesos released and diverted to non-program projects over the past two-and-a-half years through the Disbursement Acceleration Program (DAP) under the President’s Office itself—which the Supreme Court on July 1 declared as unconstitutional.
While the issue of Aquino’s personal integrity remains debatable, in the minds of many Filipinos too mired in poverty to care about the arguments, this Administration can be assessed in the only way they know how—by the fact that they remain as poor as they have always been.
The elusive inclusive growth
The Aquino Administration has inherited an economy which grew a robust 7.63 percent in 2010, and except for 2011 when GDP growth slackened to 3.66 percent, the years that followed showed the pace of expansion returning to much the same territory as when Aquino started.
Growth picked up to 6.8 percent in 2012 and rallied to 7.18 percent in 2013. Even including the anomalous 2011 performance, the Philippines’ annual average growth rate since the election of Aquino has been a remarkable 6.3 percent.
Yet at the same time, it is an economy that does not appear to be producing gains for a large part of the population. Neither unemployment nor the poverty rate has changed significantly throughout the first four years of this term and is not likely to be appreciably reduced in the remaining two years with no big changes in the economic approach expected.
The unemployment rate has stood at 7 percent for most of the last four years, while 25 percent of the population still live below the poverty line, subsisting on less than $400 annual per capita income.
Critics would say Aquino’s priority task should have been started four years ago: to create the conditions for converting the strong growth momentum into self-sustaining economic progress.
All of that raises an important question: Is this brand of economic growth as claimed by the government—backed with the evidence of high GDP growth rates—the sort that is actually making an impact on the way of life most people in the Philippines live? Is GDP in fact an accurate metric to gauge progress achieved by the Philippine economy?
For Accord Capital Equities’ Justino Calaycay, GDP is not a perfect measure, but is at least a consistently objective way to look at the economy.
But he also pointed out an important distinction. “We must take note, however, of the difference between growth and progress,” he said. “Growth merely suggests whether the economy is expanding, contracting, or even remaining flat, no more, no less. Progress, on the other hand, indicates what the government means when they say ‘inclusive growth’—that the numbers translate to actual benefits. GDP measures growth and we must take it as such.”
“Our economic managers should come up with a way to quantify progress,” Calaycay explained. “In this sense, progress cannot simply be taken to mean the sprouting of infra projects, et cetera. From a socio-economic perspective, it means that real wages are growing, [and]people are motivated to be more productive, adopting a positive view of themselves.”
Bank of the Philippine Islands (BPI) associate economist Nicholas Mapa acknowledges the improved economic environment over the last four years and credits it to the central bank’s maneuverings.
“There has been an undoubted increase in overall growth of the economy during the time of Aquino as we’ve seen our average growth outstrip our medium-term average. Back-to-back above-7 percent growth is also something we have not seen in a long time,” Mapa said. “I would not attribute the majority of it to ‘good governance’ as espoused by the Administration.”
“I would attribute the torrid pace of economic growth more to the BSP (Bangko Sentral ng Pilipinas), as it was able to provide a low interest-rate environment given the favorable inflation dynamics we’ve enjoyed in the past two years,” he added.
Forecasts scaled back
Prior to the first quarter’s lower-than-expected 5.7 percent GDP growth print, most analysts had an optimistic view of the year’s performance, with growth estimates ranging from 6 to 7.5 percent and averaging just over 6.5 percent, approximately matching the government’s 6.5 to 7.5 target range for the year.
So what was responsible for the first quarter’s disappointing result? The lower growth rate was attributed mainly to flat government spending, which increased just 2 percent year-on-year in the first quarter; a second straight quarter of retraction in construction in both the public and private sectors; and industrial growth that at 5.5 percent was less than half the 11.34 percent growth recorded in the same period a year later.
The International Monetary Fund (IMF) has toned down its growth outlook for the Philippines for this year, though it stressed the local growth picture remains fairly strong compared with that in other countries in the Association of Southeast Asian Nations (Asean).
The IMF cut its GDP forecast for 2014 to 6.2 percent from the 6.5 percent it announced in April. That falls below the government’s 6.5 – 7.5 percent full-year target.
According to IMF Resident Representative to the Philippines Shanaka Jayanath Peiris, the revised outlook was due mainly to the slowdown seen in the first quarter to 5.7 percent.
Peiris added, however, that the IMF still expects the economy to recover as fiscal spending and exports will rebound in the second half of the year.
“In the Philippines, the growth outlook is predicated on fiscal spending—government spen–ding, especially on the [post-Yolanda] reconstruction going ahead as expected in the budget.”
“We are basically assuming the government’s spending target goes according to plan,” he said, referring to the P266 billion budget deficit target of the government this year.
The IMF is also expecting that global economic prospects may improve in the second half.
Before last week’s IMF announcement, the Times analysts had revised their estimates downward in an earlier reaction to the first-quarter growth slowdown to 5.7 percent.
Now they see full-year 2014 growth at an average of just under 6.5 percent, with forecasts ranging from 5.9 to 6.6 percent. This is more or less in the same range as the IMF projection.
Calaycay of Accord explained, “We had projected a 2014 GDP of between 6.4 percent and 6.9 percent, but slower numbers hit our base assumptions with the 5.7 percent result in the first quarter. So we have conservatively scaled back our projections to between 6.1 and 6.5 percent, which demands quarterly growths of between 6.2 and 6.3 percent moving forward.”
Regional banking giant Asian Development Bank offered a slightly more positive forecast of 6.4 percent for the full year, but cautioned that the impact of ongoing reconstruction efforts from last year’s typhoon Yolanda may take some time to be felt.
“Rehabilitation and reconstruction in areas hit by the natural disasters may not have a significant impact on the economy until late in 2014 and 2015 as the direct and timely transfers of government resources to local governments and affected communities have been hindered by highly centralized national government systems. Also, regional and local administrations have limited capacity to implement reconstruction and rehabilitation programs. These matters are being addressed, which could accelerate work in the affected areas,” ADB said.
Signs of fatigue
Prior to that, HSBC had offered a more sober view of the Philippines’ growth for the rest of 2014, saying that the above-6 percent expansion that has persisted through most of Aquino’s term was now “showing signs of fatigue.”
Pegging Q1’s lower growth rate as the start of a trend, HSBC cited decreasing government spending, slowing consumption and an easing rise in exports and remittances as indicators that GDP growth would probably not top 5.9 percent for the remainder of the year.
Without exception, both the government and private-sector analysts expressed concern about the effect of higher food prices on inflation, as well as a variety of other factors.
In a research brief, Standard Chartered Bank Global Research explained the impact of higher food prices. “Since Typhoon Haiyan (Yolanda) struck the country in November 2013, food inflation has contributed an average 2.3 percent to headline inflation, more than twice the 1 percent average of the previous 24 months. A potential El Niño weather event this year could cause food inflation pressures to escalate. We estimate that a 1 percent increase in international food prices can cause the Philippines’ headline and food inflation to rise by 1.9 and 5.2 percent, respectively,” the report said.
While still within the government’s own 3 percent to 5 percent inflation target band for 2014, May’s 4.5 percent inflation rate pushed the upper limit of the band and caused some alarm; notably, May inflation was almost 2 percent higher than the 2.6 percent recorded a year earlier. May was also the third straight month of higher inflation results, rising from 4.1 percent in April, which was in turn marginally higher than March’s 3.9 percent.
While also noting the lingering effects of Yolanda, HSBC Global Research pointed out:
“More worrying are long-term structural issues. Production, whether it’s food or electricity, is still short of what’s needed to keep up with rising demand. El Nino is likely to exacerbate these supply constraints, as it is expected to cause below-average rainfall in the fourth quarter of 2014 and first quarter of 2015.
“Excess liquidity, too, is another headache. M3 accelerated sharply in recent months on higher deposits and currency in circulation. Credit growth also accelerated, further stoking inflationary pressures,” HSBC said.
For now, the consensus among analysts is that the government’s forecast, which was revised upward to 4.4 percent after the May inflation print, is likely accurate going forward in 2014, and given that June’s inflation rate was at that exact level, that appears to be a solid forecast. However, there is a growing belief that increases in benchmark interest rates, which the Bangko Sentral has so far avoided, may be necessary to keep inflation from breaching the 5 percent ceiling sometime this year.
The slight easing of inflation in June seems to have given the Bangko Sentral some breathing room for policy adjustment, as had been reported by The Times.
While reiterating that it remains “watchful” of potential inflationary factors and that the central bank has several policy tools at its disposal, the BSP has so far not announced any new move to actually use any of those tools again.
The guessing game continues for the markets over what the Monetary Board may do when it next meets on July 31 with the policy options available to it to deal with inflationary risks—adjustment of banks’ reserve requirements, or adjusting interest rates on the overnight lending, borrowing, and Special Deposit Account windows. Most analysts expect to see more policy tightening based on the BSP’s recent pronouncements.
(Part II of this three-part report will discuss the Equity Market and appear on Wednesday.)