ONE of the biggest jobs of the Bangko Sentral ng Pilipinas (BSP), just as it is for any central bank, is the careful management of information. What the central bank has to say can and does have a profound effect on the national and world economy; a good example is the way world financial markets move after even the most innocuous-sounding comments from the US Federal Reserve are parsed to find clues to future interest rate movements
Knowing this, the central bank carefully calibrates its statements to have the impact it wants them to have, which is almost always to give the public and the markets the strong impression that the economy is in sound condition, all risks and contingencies have been identified, and everything is firmly under control. The leadership at the BSP – Governor Amando Tetangco Jr., and his deputies Diwa Guinigundo and Nestor Espenilla Jr. – are excellent communicators in this regard, and to be fair to them, they are pretty good at the rest of their jobs, too, and have contributed greatly to building a robust economy; because of their efforts, the rhetorical calisthenics that they have to engage in when discussing economic indicators are not as strenuous as they could be.
Nevertheless, the old saying, “you can’t polish a turd” is true even for central bankers, and despite their best efforts, not even the silver tongues at the BSP can make everything sound positive. That was the case this week when, following a number of assessments by various analysts and credit ratings agencies that expressed some misgivings about the direction of the Philippine economy, Deputy Governor Guinigundo took time on the sidelines of a business forum to assert that a narrowing current account surplus was not a sign of trouble, but actually a sign of a healthy, growing economy.
The current account, to quickly and simply summarize it, is essentially the country’s balance sheet in relation to the rest of the world. If it shows a surplus, it means the country is taking in more money than it is spending; if it shows a deficit, it means the country is spending more than its various sources of revenue are contributing. In general, a surplus is considered good and a deficit is considered bad, but it’s not a black-and-white judgment; the scale of the surplus or deficit and its underlying causes are important as well. A large surplus might not necessarily be good, if the country is not developing, and conversely, a deficit may not necessarily be bad, if the country is spending heavily to build infrastructure or create new industries and jobs.
Right now, there is a current account surplus, but it is far smaller than the BSP anticipated when it made its projections at the beginning of the year. The central bank had originally forecast a full-year current account surplus of $5.8 billion, but through the first six months of this year, the surplus stood at only $778 million, and not only has no chance of catching up to even come close to the original target, may slip into a deficit by the end of the year.
And the BSP is worried about it. The speed with which it responded to the negative views of economic observers is revealing; the central bank evidently felt it should nip the growing alarm in the bud, before markets and investment flows react to it. Another indicator of BSP concern is what Guinigundo had to say about the shrinking current account surplus, in the sense that his comments were quite detached from reality.
According to Guinigundo, the smaller current account surplus is actually a good sign for the economy, an indication that the economy is growing. He explained that the current account surplus narrows when there is heavy investment in infrastructure (which implies government spending), and investment by way of imports of capital goods, and raw and intermediate materials needed for production. These are all things, Guinigundo said, that might reduce a surplus or even create a deficit now, but in the future would be reflected in economic growth that would eventually balance out the short-term drop.
That is all true, but that’s not what’s actually happening right now. There has not been a surge in spending on infrastructure; as of July, the latest figures available, government infrastructure spending only inched up by one percent. The reason is perfectly understandable, as even President Rodrigo Duterte pointed out. Although his administration has announced plans to proportionally increase infrastructure spending, as of now it is still operating on the 2016 budget of the former Aquino government; the Duterte administration’s plans at this point are just that – plans, which won’t take effect until the beginning of next year with the implementation of the current government’s first budget.
Guinigundo was, at least partly, basically attributing the state of the current account to a reason that hasn’t happened yet, which seems to suggest the BSP either does not have a very good idea of why the current account surplus is much smaller than it had anticipated, or more likely, does not want to say in order not to aggravate worries in the markets and cause an even bigger downturn.
The main reason for the smaller surplus is the persistent trade deficit, which is a chronic problem for the Philippines, and has grown worse over this year because imports have picked up – Guinigundo’s observations on that, at least, were entirely accurate – but more because global trade has cooled rather dramatically, and the country’s exports have declined. That is something the BSP can do nothing about, and it is the nature of central bankers to be nervous about things they cannot control. The implied warnings about the economy from analysts, furthermore, are things that the BSP cannot control in the future, either – the analysts are suggesting that it is critical that the government follow through with its bold plans to ramp up spending, which will in turn spur investment by the private sector, and while the BSP can have some effect on that through monetary policy to make things a bit easier, its impact will be limited.
In effect, then, the latest statements from the BSP on the current account amount to an echo of what everyone else is saying: While the plans of the current government are promising, the time has come for less talk and more walk.