THE Philippines will need to work on improving its business environment and fiscal position to boost investments and help the economy sustain growth rates of 6 percent to 6.5 percent over the next decade, London-based research consultancy firm Capital Economics said.
In a research note, Capital Economics Asia economist Gareth Leather said investment plays a key role in driving economic growth, noting that it provides a direct boost to domestic demand in the short-term but also helps over the longer term by boosting the productive potential economy.
In the Philippines, investment as a share of gross domestic product (GDP) has been creeping up in recent years due to rapid economic growth. But at 22 percent of GDP, it is still much lower than investment in other countries in Asia, Leather noted.
He explained that one way of assessing whether a country is over- or under-investing is to look at the incremental capital output ratio (ICOR), which measures the amount of investment needed to produce an extra unit of GDP.
In the case of the Philippines, Leather said that the country’s ICOR is very low at below 4 percent, which can be traced to decades of political unrest, corruption and weak fiscal position.
He said that for much of the post-war period, the Philippines was arguably one of the most badly governed countries in Asia.
“Military coup attempts were commonplace, the economy lurched from crisis to crisis, corruption was rife and the business environment was appalling. Given such backdrop, it was hardly surprising that investment was so low,” the economist said.
Another reason why investment is so low is because in the past years, the government spent more of its GDP for debt servicing rather than investments, he added.
Plenty of room to invest more
On a bright side, Capital Economics said a lower ICOR indicates there is more scope to boost growth by increasing investment, which suggests that there is plenty of room for the Philippines to invest more.
“That said, we believe the Philippines could grow faster by investing more,” Leather said.
One way to boost investment is to create a stable and predictable business environment in the Philippines, he pointed out.
“Companies need a stable and predictable business environment if they are to invest more,” the economist said.
Encouragingly, Capital Economics noted that the situation has started to turn around as political unrest since 2010 has declined, while corruption scandals that tarnished the country’s image with foreign investors have also fallen sharply.
“It is notable that the Philippines had climbed the rankings of various international league tables that aim to measure competitiveness, the business environment and corruption levels,” Leather said.
He also noted that with government debt now down to the equivalent of about 35 percent of GDP in 2014 from a peak of 70 percent in 2003, debt servicing costs have fallen sharply and now constitute just 15 percent of total spending.
“This in turn has given the government room to boost spending on other areas. Encouragingly, spending on infrastructure has been increasing steadily over the past few year, and is set to reach over 20 percent of government spending this year,” the economist said.
Overall, Capital Economics said while success is by no means guaranteed, the prospects for investment look bright.
“The positive outlook for investment is one of the key reasons why we remain optimistic on the outlook for the Philippines… We think growth in the Philippines will average around 6 percent to 6.5 percent over the next decade,” Leather said.
Investment in human capital
In a separate statement released over the weekend, the government said the Philippines has a shot at becoming a major economic powerhouse over the long term, with the rising investment in human capital development complementing the rising number of a young population.
Starting this year until 2050, the Philippines is expected to be within the “demographic window,” loosely defined as a period when a great majority of the population are of working age.
Because the number of people in the workforce far outweighs that of dependents, the increase in incomes may accelerate. But this can only happen if there is good quality labor force, it said.
Editha Martin, executive director of the Investor Relations Office (IRO), said the government’s growing budget for human capital development shows the intention to further improve the quality of workforce.
It also reflects the government’s desire to enable the economy to reap the potential demographic dividends, she added.
“Consistently rising investments in health and education will help ensure that the Philippines does not miss out on the opportunity offered by its entry to the demographic window,” Martin said.
Under the Aquino administration, the government noted that budget allocations for education and health have risen substantially year after year.
The budget for the Department of Education stands at P367.1 billion for this year, up 18.6 percent from last year’s while the budget for the Department of Health is set at P108.2 billion for this year, up 19.2 percent from last year’s.
Moreover, the budget for the Conditional Cash Transfer (CCT) program, the government’s cash dole scheme which encourages school attendance among children from poor households, is high in the government’s agenda. Its budget of P62.3 billion for this year is six times the P10-billion allocation in 2010.
Sustaining the trend
Economic Planning Secretary Arsenio Balisacan, who also heads the National Economic and Development Authority (NEDA), stressed the need to sustain the trend of rising investment in human capital development.
“We need to understand that having a fast growing working-age population is a boon for the economy, but only if we do two things: invest more and more in human capital development and make sure the job opportunities match the skills of the people,” he said.
He underlined the need to make education more accessible and to intensify measures that will make the country’s investment climate more attractive.
Based on official projections, the country’s working-age population, or those who will turn between 15 and 64 years old this year, will account for two-thirds of the total population of 101.6 million.
The share of the working-age population is expected to rise to 68 percent of 110 million people in 2020, and further to 70.6 percent of 125.3 people million in 2030.
Meanwhile, the IRO is organizing the 28th Philippine Economic Briefing which will be held on September 30 at the Philippine International Convention Center.
The briefing will report to the public recent macroeconomic developments and provide updates on priority sectors of the government. During the briefing, in-depth discussions on government strategies and private-sector suggestions to further boost the country’s chances of reaping demographic dividends as well as infrastructure development will be held.