SPECIALREPORT

Economy cools, but remains stable

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Controversies hamper govt spending; experts see somewhat better 2015

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Last of two parts

THE fiscal management of the Philippine economy under the Aquino Administration in 2014 was fraught by controversy, the biggest of which was the scandal that erupted over the administration’s “disbursement acceleration program,” or DAP.

The program, which was revealed in a privilege speech in the Senate by Senator Jinggoy Estrada in September 2013, was intended to boost government spending by designating budget disbursements not used by a given date as “savings” and realigning them to other purposes. After six months of hearings, the Supreme Court, by a unanimous vote (with one abstention), declared the essential parts of DAP unconstitutional on July 1.

Ironically, the “acceleration” of disbursements seemed to have the opposite effect; as it has been for most of the past four years, the Aquino Administration was again in 2014 dogged by criticism for underspending, which in turn was blamed for slowing economic growth. Slow or misapplied government spending also figures prominently in some of the economic forecasts for 2015.

On the other hand, the Philippines earned praised for its financial management of debt, the country’s balance of payments, and its banking system. Although risks and challenges are acknowledged, the country’s fundamental fiscal position is generally seen as sound, and earned the country further sovereign credit ratings upgrades during the year.

Spending seen as growth brake
In April, the Asian Development Bank (ADB) projected 6.4 percent growth for the Philippine economy this year, and 6.7 percent for 2015. In September, the bank lowered the forecasts to 6.2 and 6.4 percent, respectively, and earlier this month, again lowered its outlook to 6.0 percent for this year, but keeping the revised 6.4 percent forecast for 2015.

Similarly, Moody’s Analytics, the research arm of ratings firm Moody’s, offered a rosy forecast early in the year, raising its full-year growth projection from 5.4 percent to 5.8 percent in March. The estimate was still below the lower end of the government’s 6.5 to 7.5 percent goal, but Moody’s expressed concern that recovery efforts from 2013’s Typhoon Yolanda would only begin to have a positive impact on the economy in the second half of 2014, even though the agency stressed that, “The rest of the economy has continued to perform strongly.” In October, the forecasts were adjusted upward somewhat, expressed in a range of 5.8 percent to 6.3 percent for 2014 and 6.0 to 6.5 percent for 2015. By November, however, Moody’s was warning it would likely lower its 2014 forecast following Q3’s disappointing 5.3 GDP growth report.

A few days before Christmas, a final update for the year was released by Moody’s in which the agency maintained its earlier 6.3 percent and 6.5 percent forecasts for 2014 and 2015, respectively, but in its assessment pointedly reiterated a theme that was highlighted in ADB’s forecasts, as well as those by other analysts: Economic growth was being hampered by poor use of the budget by government, not only in terms of its direct impact on GDP, but in the lack of the expected multiplier effect because of slow development, particularly in infrastructure.

The long delay in beginning large-scale reconstruction from the effects of Typhoon Yolanda is probably exemplary. The catastrophic storm struck on November 8, 2013, yet it was only in July of this year that the long-promised reconstruction plan was completed and only in late October that it was signed by President B.S. Aquino 3rd, leaving very little time remaining in 2014 for any impact on the economy to be felt.

Strong monetary management
While the budgetary performance of the Executive branch of the government may have been assessed as being below its potential, analysts have had little but praise to offer for the efforts of the central bank throughout the year. When inflation became a concern in the latter half of the year – rising from a 3.0 percent average in 2013 to a peak of 4.9 percent in July and August 2014 – the move of the BSP to raise its benchmark interest rates by 0.25 percent at the end of July and again in mid-September was generally considered well-played; combined with the impact of much lower oil prices, the monetary tightening seemed to have a positive effect, with inflation retreating to its lowest level of the year so far (December inflation figures will not be available until next month, but are expected to be lower still) at 3.7 percent in November.

Likewise, the BSP’s oversight of the broader banking sector and credit environment has been positively noted; the central bank increased reserve requirements for banks by one percent in March and again in May. While credit has substantially increased – the amount of banks’ outstanding loans grew by an average of about 20.76 percent per month through October – the percentage of non-performing loans has declined to just above 2 percent, while the overall loan loss provision (LLP) ratio for banks has risen to about 139 percent.

Still a positive outlook
Roberto de Ocampo, a former Finance Secretary and currently chairman of Veteran’s Bank, told attendees at a forum earlier in December that 6.5-percent economic growth in 2015 “is possible if certain conditions are met,” primarily addressing a potential energy shortage in Luzon next summer, increasing infrastructure development, easing restrictions on foreign investment, and passing the Bangsamoro Basic Law “within the bounds of the Constitution” in order to encourage development in Mindanao.

De Ocampo’s view is similar to that of others that have offered a forecast for 2015: The fiscal position of the country is fairly sound, so if the fiscal performance of the government improves – which it is assumed it must – 2015 will be a reasonably good growth year for the Philippines, and the country will be among the top performers in the region.

Besides ADB’s 6.4 percent forecast and Moody’s 6.0 to 6.5 percent forecast, other notable predictions include the Organization for Economic Cooperation and Development (OECD) at 6.2 percent; the World Bank at 6.7 percent; the International Monetary Fund and ANZ Bank at 6.3 percent; and at the lower end of the scale, The Economist Intelligence Unit and Business Monitor International (a part of the Fitch group) at 6.0 percent.

The Manila Times’ own analysis is similar to the consensus. We expect the stable fiscal position from sound monetary policy and debt management to continue in 2015, with lower inflation – largely a result of lower fuel prices – supporting strong consumer spending, which as always is underpinned by steady overseas remittances and a fairly robust services sector. While the expectations for noticeable results from stronger government spending are perhaps optimistic, some progress is anticipated from increased reconstruction activity in the Visayas and pre-election ‘window-dressing.’ Consequently, we expect full-year 2015 economic growth to be very close to the average forecast of other analysts at 6.3 percent.

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