Low inflation target will not hamper 2015 growth – DOF

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The government’s low inflation target for next year is not likely to hamper Philippine economic growth, a government economist said on Tuesday.

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Gil Beltran, Department of Finance (DOF) undersecretary and chief economist, made that statement following a recent Standard Chartered Bank report that the government’s 7 percent to 8 percent growth target for 2015 looks “ambitious” when combined with the central bank’s 2 percent to 4 percent inflation target for next year.

The StanChart report said that the inflation target in 2015 could be a constraint on Philippine growth given that it will oblige the Bangko Sentral ng Pilipinas’ (BSP) to tighten liquidity and raise interest rates, thus dampening investment.

“The SC [StanChart] researcher should have looked at recent data to find out the strong negative correlation between GDP [gross domestic product]growth and inflation,” Beltran said.

GDP price deflator
The economist pointed out that in 2012 and 2013 when GDP growth reached 6.8 percent and 7.2 percent, respectively, inflation (using the GDP price deflator) dropped to 1.9 percent.

In absolute terms, however, full-year inflation was at 3.2 percent in 2012 and 3.0 percent in 2013, according to data from the Philippine Statistics Authority (PSA), although these were both lower than the 4.6 percent recorded for 2011, when full-year GDP growth was 3.66 percent.

“In theory, when growth rises, the supply of goods available in the market also rises. This dampens price levels and in turn, reduces interest rates. This is the reason why the lowering of the inflation target should not be seen as negative factor for growth,” he said.

Beltran added that the central bank’s moving from a regime of negative real interest rates to positive real interest rates is more sustainable in the long run, because it avoids bubbles and maintains growth in savings.

The economist was referring to the BSP’s tightening bias when it recently hiked its benchmark interest rates for overnight lending and borrowing by 25 basis points.

At the same time, the DOF economist noted that the slowdown in growth to 5.7 percent in the first quarter of 2014 is just a “short-term phenomenon and should not be seen as a trend.”

He cited as examples the double-digit growth in the manufacturing sector and the robust investment growth in terms of investments in economic zones and foreign direct investments net flows.

Slow govt spending
Beltran contradicted the report’s statement that slow government spending is also likely to have an impact on GDP growth.

The DOF economist said slow government expenditures in the first quarter may be reversed in the next few months as the disbursement rate is one of the eligibility requirements of the performance-based bonus (PBB) for government agencies.

“When government departments were reminded that disbursement rates below 90 percent will automatically disqualify them from PBB, government expenditures quickly rebounded by a hefty 44 percent in June 2014,” he said.

Surplus savings
In terms of growth, Beltran said the medium-term growth prospects of the economy are sound and the targets seem achievable.

He also said the Philippine economy has the capacity to grow faster than the 7.2 percent attained last year with or without the boost from election spending.

The economist explained this growth is possible because first, the Philippines’ gross national savings exceeds its gross domestic investment by between 3 percent and 6 percent of GDP, depending upon the estimation approach used.

“In the last 10 years, surplus savings averaged 3.3 percent using the current account balance in the BOP [balance of payments]as basis. In the first quarter of 2014, it was set at 3.1 percent of GDP,” he said.

Using the national income accounts approach, the average excess saving for the last decade is 3.8 percent of GDP. Last year, it was 5.2 percent of GDP, he added.

“This implies that the Philippines has excess resources to spend to push economic growth higher. If these savings surpluses were invested in productive activities, the economy would grow by the amount of new investments plus the real rate of return on investment,” Beltran pointed out.

Capital investment
Second, Beltran noted that economic theory states that growth arises from new capital investment and increases in productive efficiency.

The DOF economist said that during the last two years, growth in fixed capital investment has been very robust, rising 10.8 percent in 2012, 11.9 percent in 2013 and 11.2 percent in the first quarter of 2014.

Growth in GDP can, thus, potentially run at double-digit rates, he added. Lastly, Beltran said government investment will contribute to this effort through planned increases in the national government (NG) infrastructure investment from 3.1 percent of GDP in 2013, eventually reaching 5 percent of GDP in 2016.

“Regression analysis shows that NG infrastructure investment has a real GDP growth elasticity of 1.96 that implies that the economy will grow by almost twice the original amount of investment,” he explained.

“If these trends continue and plans are implemented as targeted, the country would attain the 6.5 percent to 7.5 percent growth target for 2014 and the 7 percent to 8 percent growth in 2015,” he said.

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