THE FINANCIAL EXECUTIVE
Business World
Macroeconomic trends over the past several months leave much to look forward to - the domestic economy has continued to grow despite the political turbulence in the early part of the year, financial markets, supported by strong capital inflows, have behaved positively, inflation rates have eased, and most importantly, the government has delivered on its promise to raise revenues and reduce its budget deficit, earning last month a stable outlook report from Moody's.
On the average, analysts predict economic growth of 4.9-5.8% in 2007. Household consumption, backed by remittances and aided by election spending, is expected to continue to underpin growth. Exports are expected to continue growing, albeit tempered by expected slower growth in advanced economies. Some election-related public infrastructure spending may also be expected. Policy-wise, the risk of going off course with respect to government's fiscal consolidation program is small as long as professional economic managers stay in charge, while monetary policy can be more flexible with the inflation rate prospectively sliding down to the 4-5% target, barring further supply shocks.
The challenge for 2007 is to transform reviving confidence into real investments, starting with sectors that have, for a while now, been expected to jump-start a fresh wave of capital accumulation - power, mining, build-operate-transfer infrastructure projects. Perhaps a demonstration of resolve to remove obstacles to doing business is required to attract the critical mass of investments needed to sustain higher growth and create jobs for the growing labor force. These obstacles are well documented in numerous studies, including those of the World Bank, and principally include, aside from macroeconomic instability, issues related to governance, i.e., corruption, voice and accountability, rule of law, as well as poor infrastructure services.
To help the course of restoring confidence eroded over the years, we can do with more examples of well- articulated and transparently executed policies and projects like the highly credible Maynilad bidding (reverting to original design of water distribution being in private sector hands) and the successful PNOC-EDC initial public offering. The opening of the NAIA Terminal 3 facility early in the year and progress in government's power privatization program can have a high immediate impact.
The positive trends notwithstanding, 2007 is an election year and the first six months will likely be lost to politics. Indeed, a highly likely scenario for 2007 would see the economy taking the backseat to politicking. The period through midyear would see investors sidelined, observing the turn of events from the elections. The greater risk to sustaining growth, however, is the administration abandoning sound economic policies (e.g., microfinance) or misspending hard-earned money on dubious expenditures (e.g., fertilizers) just to win votes.
We can nonetheless expect economic growth to proceed on momentum obtained from consumer spending and continuing exports (electronics, tourism and business process outsourcing services). Downside risks from the external sector include a sharper-than-expected slowdown in advanced economies (lowering export demand), a reversal of current trends in oil prices (stoking inflation), and global financial market volatility (complicating monetary and fiscal management).
Should election results convince the market of political and policy stability going forward, 2007 may see the economy back in the driver's seat. Should outstanding issues remain unsettled after the elections, however, the economy can be expected to continue muddling along over the medium term.
Being an optimist, I am confident that the economy's strong short-term fundamentals will continue to hold - despite porcine politics in the Year of the Pig.
