OF SUBSTANCE AND SPIRIT
By DIWA C. GUINIGUNDO
Chief Statistician Dennis Mapa announced last week that the economy expanded by 6.2 percent, an improvement over the first quarter’s 5.6 percent and the second quarter’s 5.5 percent.
Jubilation is justified. This third quarter reading is higher than the year-ago performance of 6.0 percent even as the year-to-date growth averaged 5.8 percent versus the average growth rate of 6.2 percent in the first three quarters of 2018.
This third quarter expansion reverses disappointment over the last two quarters, and validates that it was the budget impasse that temporarily pulled down growth.
Several indicators confirm that indeed, it was the budget delay that slowed down growth.
First, public consumption now tips the scale at 9.6 percent after slowing down to only 7.4 percent and 7.3 percent in the first and second quarters, respectively. Second, there was a modest growth of investment demand. Last year’s quarterly growth rates reached a high of around 20 percent for both the second and third quarters before slowing down to only 4.9 percent in the last quarter. Investment spending contracted in the second and third quarters of 2019 even as fixed capital recovered. Construction brought about recovery of fixed capital formation and the lower decline of total investment in the third quarter of 2019.
While the budget involves public spending only, its impact on the macroeconomy is deep and pervasive. Infra and social spending drives manufacturing and construction, it keeps services going especially in transportation, financial intermediation and even real estate activities. In construction alone, economic activities bounced back from its decline of 0.5 percent in the second quarter, to 16.3 percent. All three major components of services recovered momentum in the third quarter especially transport and financial intermediation.
Our third quarter growth is indeed heartening. Finance Secretary Sonny Dominguez expressed that this year’s economic expansion could hit the lower band of the growth target based on the Government’s catch-up spending plan and stronger domestic consumption. Socio Economic Planning Secretary Ernie Pernia, also expressed great confidence in taking on the challenge of attaining the low-end of the full year target of 6-7 percent for 2019.
The goal is to sustain growth by at least 6.0 percent for 2019. Secretary Pernia framed the challenge this way: the economy should expand no lower than 6.7 percent in the last three months to hit the low end of the country’s growth aspiration.
Can we do it? In today’s speak, “Keri ba?”
I believe so. Keri!
Even doomsayers admit that acceleration may continue for the fourth quarter, while expressing doubt about its sustainability in 2020. Capital Economics, actually quite an encourager for the Philippines, maintained confidence for a 6.0 percent growth for 2020, and for the Philippines to still be among the fastest-growing economies in Asia.
This optimism prevails despite many headwinds such as the projected synchronized slowdown across the world economy.
This global slowdown means demands for our exports, local products and services related to external trade—meaning consumption goods, investment goods and even public goods and services—could slow down or contract. Out there, multilateral trade and investment are being abandoned in favor of narrow, parochial modalities.
The national income accounts capture the impact of this development. Both exports and imports of goods and services slowed down in the three quarters of 2019 and year to date deceleration is substantial. This is reflected in the significant weakening of foreign direct investment. For the first eight months of 2019, net inflows of foreign direct investment reached $4.5 billion, a level 39.7 percent lower than the year-ago level of $7.5 billion.
The decline was traced to negative market sentiment due to global uncertainties and market volatilities. Various components showed marked decline but it is the net decline in the all-important capital investments that is of strategic importance.
I am concerned by these developments but I am not disheartened.
This is not the first time the Philippines has experienced disappointing external trade. Instead of negativity, what I see is how we, as a country, have grown by leaps and bounds despite inhospitable external payments developments. Our domestic demand has been much stronger than the vicissitudes out there. In fact, we could have grown by double digits if it were not for vulnerabilities in our external competitiveness, and our relative isolation from the global value chain.
Vietnam’s long-term and organized trade and industrial strategy is worth looking into if we are to boost domestic demand and see growth rates not just at 6.0 percent but even beyond 7-8 percent.
Indeed there is much potential still… and against the formidable headwinds, we can count on the tailwinds.
Domestic inflation has considerably gone down. This should boost household and government consumption which accounts for four-fifths of our gross domestic product. With stable inflation, both domestic and foreign direct and portfolio investors should take heart and invest in the Philippines.
Monetary and fiscal policies have brought this about and if a neutral monetary policy stance is pursued in the immediate future, we can expect liquidity and credit growth to remain appropriate relative to the growth of the domestic economy.
It is good that the banks, based on the third quarter 2019 senior loan officers survey, continue to lend out without compromising lending standards. This is the challenge to monetary policy: not to go on further easing lest mispricing of risks sets in as the experience during the Great Moderation teaches us to avoid.
Government spending has been on the upside. Public expenditures as a percent of GDP has been sustained at nearly 20 percent, the same level as last year. The challenge for Government is to further accelerate spending and improve execution of public infra projects. The deficit to GDP ratio was modest at 2.2 percent versus year-ago level of 3.2 percent, this year’s target.
Government has done well to steer public spending to complete as many flagship projects under the Build, Build, Build Program because there is clearly some fiscal space to do so. Revenues have been rising, money is available. Tax efforts continue to improve. Senator Frank Drilon’s description of the infra program as a dismal failure should be taken constructively — as a challenge to do more, and to do it faster.
Business and consumer expectations surveys are both encouraging. Business confidence is expected to rise for the fourth quarter. This bodes well for business activity for the last quarter. Purchasing Managers Index continue to point to economic expansion. This is also true for consumer sentiment. Both readings for the fourth quarter and the next 12 months trace higher confidence and positive outlook. If about four-fifths of national output promises good outturns for the fourth quarter and Government continues to spend, we can be more optimistic that the fourth quarter growth can tip the scale right of 6.7 percent.
In fact, some studies indicate that the business cycle for the Philippines may be nearing the end of the downcycle. It is about to shape up after nearly eight quarters of downtrend. With higher infra and social spending, this can very well be a quick reality.
The headwinds are strong, but the Philippines’ tailwinds are much stronger.
Keep calm, stay optimistic and keri on. Kering-keri!
Tags: DIWA C. GUINIGUNDO