IF there was one message that came across loud and clear in yesterday’s (Friday) Manila Times editorial, it was that the conservative approach to managing the Philippine economy is going to lead this country into some dire circumstances, probably very soon, unless there are radical changes to the way things are done
Lighten up, Philippines
To put it in un-academic terms, the economic managers of the Philippines need to lighten up.
Since the latter part of the Arroyo Administration’s time in office, the BSP has set a somewhat defensive tone that the rest of the country’s economic institutions have willingly followed: Keep credit in tight check, avoid direct financing of projects and programs as much as possible, maintain the value of the peso within a very tight range, and approach anything long-term like large-scale infrastructure projects or modernization of investment and tax regimes with extreme caution, if they cannot be avoided entirely.
And to be fair, it was the right call for a long time. The global economic calamity of 2007-2008 that cut down giants like the US, Europe and Japan left the “emerging economies” like the Philippines in a sauve qui peut situation. With the memory of the Asian Financial Crisis of nearly a decade earlier still relatively fresh, the region weathered the storm rather well; the Philippines, to the credit of an outgoing president who knew a thing or two about economics and had skilled technocrats like BSP Governor Amando Tetangco Jr. in the right places weathered it even better than the rest.
At some point, however, the circumstances changed. The US, European and Japanese economies, while still beset with a number of uncertainties, are not nearly in as poor a shape as they once were.
China, whose prospects rose rapidly as the West struggled with the problems it created for itself, is now cooling down—not really headed for a collapse, as some observers believe (or may be hoping), but perhaps settling to a sort of plateau. What that all means is that the assumptions on which the controls imposed on the Philippine economy have been based are likely outdated. It is no longer as necessary as it was in the recent past for investors from the Western world to seek a safe haven in our corner of the globe, and China’s potential as an alternative market for outbound investment and exports has probably peaked.
Economic data published this week seems to support those points of view. Following a slower-than-expected first-quarter GDP growth rate, factory output, exports, foreign direct investment, foreign portfolio investment, approved investments into economic zones, and even consumer sentiment all appear to be in a headlong retreat. A deeper indicator, inflation, is also diminishing rapidly, suggesting stagnation in consumer demand and as a consequence, contraindicating wage, job and production growth.
Yesterday’s editorial made two solid recommendations that are worth repeating: First, the BSP should—without, I might add, allowing itself to be handcuffed by assumptions of what the US Fed may do—cut its benchmark interest rates, which currently stand at 6.0 percent for the repurchase rate and 4.0 percent for the reverse repurchase rate. Both the rate of inflation and the exchange value of the peso, which are the two factors primarily controlled by benchmark interest rates, both have room to move; the inflation rate can safely be allowed to increase a little, while the peso can just as safely depreciate to some extent. Granted, the balance that must be struck is a delicate one, but is by no means impossible to achieve. A modest rise in inflation will encourage production and exports (manufacturers can earn more for what they produce), and exports will be further supported by a slightly lower peso.
The second recommendation was to fast-track efforts to loosen investment restrictions. The most immediate prospect for that, the so-called “economic cha-cha” measure introduced in Congress, died on Thursday due to inaction. With respect to that particular measure, which seems to have been rushed for political rather than sensible economic reasons, allowing it to die may have been for the best. The general initiative, however, should not be allowed to fall by the wayside entirely. The simplest reason why it should not is that “brick and mortar” investments do not ebb and flow like portfolio investments, or portfolio-based FDI (which is what conventional components of FDI like intercompany borrowings and dividend reinvestments really are); the money is more likely to stay here and add value.
When it comes right down to it, the rhetoric about the Philippines’ “robust” economy no longer matches the actions applied to keeping it that way, and this week’s disturbing indicators are a signal that the cautious approach is producing rapidly diminishing returns. That needs to change, before the circumstances deteriorate far enough to become the next crisis.