“Go placidly amidst the noise and waste, and remember what comfort there may be in owning a piece thereof.”
The Philippine economy may be “doing okay for now,” but is this the economy anyone really wants, and how long can it last? A little more than a month ago, I wrote a column (“Economia Nervosa,” Oct. 14) wherein I discussed the impression forming among some of us who closely monitor the business news on a day-to-day basis that the “promising” Philippine economy was beginning to deteriorate.
While all the usual economic indicators were still positive, nearly all of them were not quite as positive as they were in preceding months, and the trendlines were all pointing downward.
The headlines last week seemed to confirm that the slide is continuing. The research arm of ratings agency Moody’s downgraded its estimate for the Philippines’ third-quarter GDP growth to 5.9 percent, and lowered its forecast for the full year to 5.8 percent, citing slowdowns in government spending and manufacturing output. On the same day, the BSP announced that it had sharply lowered its forecast for the country’s year-end balance of payments position—a $4.5 billion swing from a modest $1.1 billion surplus to a deficit of about $3.4 billion.
There are other signs as well. The value of the peso is eroding, and is expected by most analysts to approach the P46:$1 level by the end of the year. That is not entirely bad news, because a weaker peso does benefit exporters, but it comes with the trade-off of more expensive imports, more upward pressure on inflation, and lower demand for government securities.
Over in the equity market, Philippine stocks—at one point in the not-too-distant past, the best-performing in the world—seem to be stuck in a rut. The boost the market was expecting from third-quarter corporate earnings results never materialized, not because the results were necessarily bad—most of the listed companies actually posted profits—but because they were in the words of one analyst, “lackluster.” Like the broader economic indicators, growth of revenues and profits across the corporate sector has slowed considerably; they are still gaining, but at a progressively slower rate.
As usual, the government has tried to put the best face on things; on the same day the BSP announced it was lowering its balance of payments forecast, it also released the results of the latest quarterly business expectations survey. Business sentiments toward the current (fourth) quarter were fairly upbeat, but less so—although still positive overall—for next quarter, the first quarter of 2015. In one respect, that is entirely predictable; businesses tend to be optimistic about the last quarter of the year due to the holiday season, and anticipate the downturn in spending after the holidays.
But the BSP had to add extra emphasis to the basically positive outlook, because it was markedly less positive than it was when businesses were surveyed in the third quarter of this year. In the business expectations survey, businesses are asked what their sentiment was toward the current quarter and the next quarter. So in the current quarter (Q4), businesses are asked about this quarter and the first quarter of next year; in the previous survey, they were asked about Q3 and Q4. Last quarter, the confidence index (or CI, the difference between positive and negative responses) for the present fourth quarter (which was “next quarter” in that survey) was 52.9, the lowest it has been since 2009. That still means that roughly twice as many businesses had a favorable outlook toward this quarter’s prospects than those that had a negative outlook, but it also means that roughly a third of businesses were pessimistic. And now that we’re in the quarter in question, that pessimism has grown—the CI is now 48.3.
Granted, the pattern is not unusual, but the baseline is lower than it has been in five years. While a basically subjective indicator like CI might not tell us a lot, it is at least a clue to the general economic mood. An atmosphere in which enthusiasm is waning is not conducive to increasing investment and expanding business activities, and indicators like the slowdown of manufacturing activity and the leveling off of the stock market tend to reinforce that notion.
What we may be seeing the beginnings of in all these “deteriorata”—little indications of erosion—is a more generalized downturn that economic theory in some ways predicts is the inevitable outcome for a consumption-driven economy. Outside influences, such as those that are driving the value of the peso, largely keeping the stock market in a stagnant position, and creating the classic “capital flowing uphill” scenario of a strongly positive current account paired with a strongly negative capital account, will eventually cause a retraction as long as the economy is overbalanced toward wealth collection rather than wealth creation.
The third-quarter GDP figures to be released later this week may give us some clue as to which direction the economy is headed, or they may not; since this is not technically a purely consumption-driven economy (no economy is), the trend in either direction is not likely to be smooth. But if we begin to see a pattern in which positive differences in the growth rate from one quarter to the previous one are consistently smaller than the negative differences in quarters in which growth slows, we should worry. That has already happened across the last three quarters (the first two quarters of this year and the last quarter of 2013), and while that’s not enough to establish a pattern, it’s something to watch carefully.