Business World
Introspective
The global outlook has become infinitely gloomier over the past couple of months, with the euro zone in a sovereign debt crisis and the US in what could be another recessionary environment. This puts a heavy cloud over the Philippine economy, whose fortunes are still in some ways tied to these countries, and opens up another period of uncertain growth.
In our central scenario, assuming global financial troubles can be contained, we bring down our growth forecasts from 4.8% to 4.3% in 2011 and from 5.5% to 4.8% in 2012. Activity would be mainly consumption-driven in our projections, with net exports likely to decline this year and not see a major resurgence the next. At the same time, government spending especially on infrastructure may remain weak, limiting the country's investment growth, though should eventually rebound.
In the worst case where European debt troubles coupled by US weakness lead to another global financial crisis of the same scale as 2008, the Philippines could remain as resilient to recession and financial volatility as it had been back then. This is in light of robust domestic demand, continued remittance and BPO inflows, historically high FX reserves, a generally healthy bank sector, and greater fiscal space this time to help counter a downturn in the real economy.
Reflective of the sound fundamentals of the country are the recent string of credit upgrades by international rating agencies and a jump in world competitiveness ranking (up by 10 slots in the World Economic Forum's latest Global Competitiveness report). These observers noted the country's strong macroeconomic management that has led to improvements in the country's debt situation, narrower interest rate spreads, and reined-in inflation.
In our best scenario, there could be a brightening in the outlook for the world economy if international efforts succeed at preventing a financial contagion coming from the euro zone and if effective measures to stimulate the US economy are put in place. Domestically, we could see a bump in economic activity if government actually succeeds in accelerating infrastructure spending as it hopes to, though the contribution of PPP to this will not likely be close to nil.
We had already cut our growth forecast for 2011 to 4.8% in our last quarterly report considering the threat posed at the time by surging global oil and food prices, weakened purchasing power of dollar remittances due to peso appreciation, and government's odd spending restraint. Supply-chain disruptions brought about by Japan's tsunami and nuclear crisis had also further weakened our outlook for exports, then expected to naturally decelerate from a recovery pace.
Based on first half performance (4.6% in 1Q2011, as revised, and 3.4% in 2Q2011), even this downscaled number has begun to look a bit optimistic, as it required the economy to grow upwards of 5.5% in the second half. The more likely figure, in our view, would be about 4.3% in 2011 (and around 4.8% in 2012) for a few important reasons.
First, while the government has vowed to redouble its spending and meet spending targets before the year ends, it may find it increasingly hard to do so. The big surprise during the second quarter had been the drop in public construction outlays, which fell by over 40%, a drastic reduction even coming from an election year. Fiscal accounts show that government (non-interest) spending during the first six months fell short of what was programmed by nearly P120 billion (about 17.5%) as wasteful projects were shelved and operating expenses cut. This presumably barred any front- loading to take place and make the most of the summer months as had been trumpeted by economic managers after early passage of the budget.
Second, in relation to this, we continue to see slow movement in the public-private partnership (PPP) program which should further stall the country's much-needed infrastructure boost. As we had discussed in earlier reports, delays traced to the lack of well-crafted feasibility studies; weak technical and institutional capacity; and overly tight scrutiny of unsolicited proposals, especially those put in the investment pipeline by the previous administration. With government's housecleaning efforts beginning to dilute investor interest rather than promote it, in the short run at least, we are doubtful PPP projects would be able to take off anytime soon.
Even the new scheme recently proposed for mass transport projects under the PPP may not yield the desired quick results. This approach, which hopes to tap cheap development loans to build the fixed component (e.g., tracks) while allowing private firms to bid for providing the rest of the system, including rolling stock and operations and maintenance, may be even harder and take longer to pull off as it introduces another layer of complexity in reconciling policies and procedural requirements of government, official funders, and private investors.
Third, the world economy has already entered what the IMF calls a dangerous new phase marked by weakened activity especially in advanced economies (the US and in Europe), falling confidence, and growing downside risks. This means another period of uncertain growth for the Philippines in view of the potential impact on exports and remittances.
On the upside, however, inflation risk has abated which helps support consumer demand and also lessens the unspoken bias for peso appreciation. Remittances while slower than expected continue to be resilient at 6.3% in the first semester. The government has vowed to make use of the extra fiscal space created and frontload spending on projects due for implementation next year.
Credit activity remains high on account of liquidity created by continued portfolio flows. Notwithstanding minimal holdings to the new troubled euro zone (only 1.4 % of total assets) and high concentration of assets in Philippine government paper and a handful of domestic conglomerates, banks are generally healthy. As in the last global financial crisis episode, we believe the Philippine economy will likely remain resilient compared to many of its neighbors in the region.
This article is an excerpt from an October 3 report written by Margarita Gonzales and this columnist for GlobalSouce, a New York based network of independent analysts. Mr. Bernardo is a board director of the Institute for Development and Econometric Analysis.
