EVEN the most incurable optimists would have found yesterday’s business headlines discouraging; not since the financial crisis in 2007-2008 has there been so much bad news in one day.
On Wednesday, data released by the government showed that the value of the country’s manufacturing output fell 4.2 percent year-on-year in April, a sharp reversal from the 10.9 percent and 9.7 percent increases recorded a year and a month earlier, respectively. Exports in April also reversed year-earlier and month-earlier growth rates, contracting by 4.2 percent, the biggest drop in two years.
Foreign direct investment (FDI) in March likewise fell, plummeting 54.6 percent to $229 million from $506 million a year earlier; for the first three months of the year, cumulative FDI is just half of the amount recorded in the comparable period last year, $851 million versus $1.71 billion in the first quarter of 2014. Total foreign investment pledges approved by the country’s seven investment promotion agencies in the first quarter also fell, amounting to just P21.8 billion, 41.7 percent lower than the P37.4 billion recorded in the same period a year earlier.
And in data released Thursday, portfolio investment – so-called “hot money” – in May registered its largest outflow since January 2014, with $569 million leaving the country. This was a complete turnaround from the $545 million inflow a year earlier, and a sharp acceleration of smaller outflows of $21.5 million and $31.1 million in March and April, respectively. This news is alarming because for the past few years “hot money” has been perceived as a strong contributor to the Philippines’ healthy financial market performance.
These dire-sounding disclosures followed news earlier in the week of a drop in imports, a moderate weakening of the peso against the US dollar and inflation that is approaching a dangerously low level. All of this follows an unexpected and disappointing slowdown in the growth rate of the country’s gross domestic product (GDP) in the first quarter, which registered a 5.2 percent expansion instead of the 6 to 6.5 percent growth rate most analysts were anticipating.
Those analysts, as well as the country’s economic managers at the National Economic Development Authority (NEDA) and the Bangko Sentral ng Pilipinas (BSP) largely attribute the declining indicators to global causes: A slowing of the Chinese economy, an apparently stagnant US economy, a weak Japanese economy that may or may not be on the way to recovery (Japan’s surprisingly high first quarter GDP growth did beat estimates by a wide margin, but whether it can be sustained is still uncertain), economic and political turmoil in the eurozone, and ongoing crises such as conflict in the Middle East, large-scale movements of refugees in Southeast Asia and the Mediterranean, a frightening epidemic of the dreaded MERS (Middle East Respiratory Syndrome) in Korea, and the adverse effects of the El Niño climate phenomenon on agriculture.
We agree with this general assessment. While the Philippine economy is certainly not flawless, it has been expanding at a respectable pace – a pace that encourages high expectations, and makes the relatively minor slowing indicated by recent data seem worse than it really is.
This does not mean, however, that the cooling of the economy should be taken lightly, because it reveals just how vulnerable the Philippines is to external influences. It should be regarded as a clarion call to our leaders to redouble their efforts to make the Philippine economy more self-sufficient.
We can offer two specific suggestions. First, the BSP should strongly consider lowering its rather high benchmark interest rates to encourage more lending and consumption. With inflation well below the lower bound of the central bank’s target range of 2 to 4 percent, there is room for easing without worry of driving inflation too high; allowing inflation to rise a little will also help to support wage growth, which in turn boosts consumer spending.
Second, the government should fast-track efforts to ease some of the most stringent foreign investment restrictions in place. More than a quarter-century of protectionism has failed to achieve steady growth in production, job creation, and wages the country needs to prosper and paradoxically left it more vulnerable to outside forces, and there is no logical reason to believe that will suddenly change for the better without some action being taken.
The economic indicators this week are disturbing, but the sky is not falling; this is still a healthy economy relative to its regional peers. Keeping it that way, however, will require close attention and active management.