The Philippine economy has enough buffers to withstand the challenges of a volatile external environment this year.
The above, in a nutshell, is what Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr., International Monetary Fund (IMF) Philippine Representative Shanaka Jayanath Peiris, and World Bank (WB) lead economist Rogier Van den Brink told participants of the recently concluded The Manila Times 3rd Business Forum.
Position of strength
Tetangco stressed in his keynote speech that the country’s 5.8 percent growth for 2015, and the fourth quarter’s 6.3 percent expansion in particular, had made the Philippines the fourth fastest-growing economy in Asia, following India, China and Vietnam.
“That fourth quarter performance also brings to 68 the number of consecutive quarters of positive economic growth. The services sector remained the biggest driver of output while the resurgence of manufacturing also helped to strengthen our base for growth,” he said.
Growth continued to be buoyed by strong private spending, aided by an increase in domestic employment and the steady inflow of remittances from overseas Filipinos. The central bank chief also pointed out that a “catch up” in fiscal spending in 2015 also helped to raise domestic output.
Low and stable prices also allowed the strong economic growth.
“For the full year 2015, the average inflation rate stood at only 1.4 percent, the lowest registered since the BSP adopted the inflation targeting framework in 2002. In the BSP, we characterize this ‘sweet spot’ as ‘the positive convergence of strong growth and low inflation,’” he said.
Furthermore, Tetangco claimed the country’s healthy banking system, founded on years of judicious reforms and financial inclusion initiatives, also aided the country’s economic expansion.
Banks’ balance sheets have remained strong: Lenders maintained more than enough capital — with capital adequacy ratios above national regulatory and international standards – and the quality of their assets continued to improve as seen in declining nonperforming loans and nonperforming asset ratios.
“The country’s external liquidity position has also continued to be robust and helped shield the economy and the domestic financial markets from the worst effects of the global shocks,” Tetangco said.
The current account has been in surplus since 2003, supported by steady remittances and, in recent years, strong receipts from the business process outsourcing sector. For 2015, the overall balance of payments position yielded a surplus of $2.6 billion, a reversal from the $2.9-billion deficit in 2014.
Gross international reserves continue to grow, which at the end 2015 stood at $80.7 billion, over $1.0 billion more than that registered in 2014. This level of reserves was enough to cover 10.3 months’ worth of imports of goods and payment for services and income, Tetangco mentioned.
“These encouraging developments have helped elevate third-party assessments on the domestic economy’s progress and prospects,” he said
For instance, Tetangco noted that several indices had the country moving up, which include those on transparency, governance and ease of doing business, among others.
He also mentioned that Fitch Ratings upgraded its credit outlook on the Philippine economy to “positive” from “stable.” This is important because it raises the prospect that the debt watcher would upgrade the country’s credit rating in the next 12 to 18 months, he said.
“Ladies and gentlemen, the facts and figures that I just discussed provide evidence to support the first headline, that is, that the Philippines entered 2016 from a position of relative strength,” Tetangco said.
IMF’s Peiris, meanwhile, said the Philippines’ steady remittances from overseas Filipino workers (OFWs), which boosts household consumption, and a strong business process outsourcing (BPO) sector would serve as “cushions” versus current and incoming headwinds.
“We think the Philippines has the most comfortable reserve position in the world. That is why we think the Philippine is the least affected from the global financial volatility,” he said.
Given the Philippine demographic dividend, wherein the young and skilled are in the workforce, Peiris said the country had a potential competitive advantage in the field of services.
“The demographic dividend has been an important aspect of Philippines competitive advantage,” he said, referring to the Philippines’ young and huge population compared to its regional peers.
“As labor cost in China and even in other parts of Asia is rising, the Philippines can be competitive if it continues to invest in its people especially in health and education,” he added.
The World Bank’s van der Brink said macroeconomic fundamentals explained to a large extent why the country was doing so well amid current headwinds.
“Per capita economic growth is up, the current account balance is positive, inflation rate is down, debt service as a percentage to GDP [gross domestic product]is down and international reserves are ample,” he said.
“Overall, the global environment dies not look too good and that will effect Philippines in a way but remember, the country is now growing at 5.8 percent,” van den Brink said.
“Even if that growth goes a bit down, its still in a very high growth environment. The economy will still rack up numbers that will be envied by the rest of the world.”.
To sustain these strong fundamentals of the economy, the main speakers shared recommendation for the government.
Peiris said in order to maintain growth over the longer term, a number of key issues needed to addressed. He identified infrastructure and attracting investment as the biggest obstacles to stable growth, pointing out that the Philippines lags the region and in fact most of the rest of the world in these key areas.
“The investment leg needs to be improved,” he said.
In addition to opening more areas of the economy to investment, Peiris stressed that improving agricultural production, implementing “comprehensive” tax reforms, raising more revenues for the government and diversifying access to financing for businesses and households should be priorities for the next administration in order to make the most of the country’s economic gains.
Peiris pointed out that big corporations were benefiting most from tax exemptions and cited the need to rationalize those perks.
“To rationalize it, the playing field must be leveled so that everybody benefits including the small and medium enterprises (SMEs). Right now, SMEs may be disadvantaged because big corporations and exporters have these incentives but some of the SMEs don’t,” Peiris said.
Obtaining that level-playing field equates to a simplified tax regime, he said, adding that this option has actually explored in other countries and could improve tax compliance in the Philippines.
Asked what could generate economic gains, Peiris insisted that the investment leg needs improvement.
Concluding his speech, the IMF official said, “Prospects are bright. We have large potential, and to realize that potential we have some key areas to focus on.”
For his part, van der Brink said the government’s inclusive growth agenda should focus more on structural transformation in agriculture; the role of small and medium enterprises in the economy; the potential of the shipping industry; and reforms in rice policy and taxes.
He said a focus on agriculture would help reduce poverty by raising farmers’ profits, lower prices of food and move workers to the manufacturing sector, among others.
In shipping, he cited the recently signed Republic Act 10668 or Foreign Ships Co-loading Act, which allows foreign ships to load and unload imports and exports along domestic routes.
“It will help reduce costs for importers and exporters and it will also aid in decongesting ports within the country,” he said, adding that to address competition, Philippine shipping firms could partner with international companies and enter regional and international markets.
With regard to rice policy, van der Brink said the government should remove quantitative rice import restrictions and a licensing system.
He also recommended that the government invest in research and development; agricultural extension; rural infrastructure, roads, irrigation, and electrification; securing property rights; and improve farmers’ health and education to increase productivity.