Introspective
One would think the year 2012 should be a particularly auspicious one, as it belongs to the dragon, a symbol of might and intelligence and the only creature of myth and legend among the Chinese animal signs. But global recovery is expected to stall in the near term with the euro zone likely falling into a mild recession, and it may be just the mythical nature of the beast that would be relevant to describing economic activity in the New Year and not delivery of good fortune.
From a slow 3.7% in 2011, we expect economic growth to improve moderately to about 4.5%, though an expansion that relies on continued remittance flows and some recovery in exports will unavoidably be fragile because of intensifying risks elsewhere in the world. The steadier engine this year should instead be public spending, as the government seems fully committed to reversing the underspending that had occurred last year when it stepped up its anti-corruption drive.
Looking at purely domestic events, the impeachment proceedings against the Chief Justice offer a temporary distraction to both Houses of Congress, taking lawmakers' attention away from important economic bills. Even if the trial does drag on a bit, we do not think it presents any real political risk owing to the popularity of the current government.
ACTIVITY: FRAGILE GROWTH
While the outlook for the global economy remains bleak in the new year, we believe GDP growth of 4.5% remains achievable, though this forecast depends crucially on private consumption remaining strong, exports reviving even moderately, and government making the appropriate policy responses.
Personal consumption, which grew by 6% in 2011, appears to be supported by a number of factors - rising remittances in peso terms, declining inflation, and credit activity sustained by high liquidity. However, as we had seen in the last global crisis, private spending can, despite sustaining factors, very easily be cut as a precautionary measure by households.
There should be some revival in exports, which dropped by 3.8% in real peso terms last year, as electronics and semiconductors fell 18.5% annually. Industry experts note the technology sector may well post double- digit gains this year by simply returning to 2010 volumes, which is quite likely as inventories have already begun to decline. But like domestic spending, it is clear that this recovery also hinges on the global economy not falling into another slump.
Much depends on whether government will be able to step up to the plate to give the economy the needed boost in 2012. We are quite optimistic about a revival in public spending based on recent actions of the budget department, which has already started to frontload expenditures, particularly on infrastructure. This should help counter an expected slowdown in private activity, with the real estate cycle, which industry experts say lasts six to seven years, already starting to turn.
We are less hopeful however about the ability of the trumpeted Public- Private Partnership (PPP) program, even in its hybrid form (i.e. tapping ODA loans), to jump-start private investment owing to continued difficulties in setting up and executing well-crafted projects that fit the government's governance framework and funders' requirements.
There currently seem to be signs of stronger activity with the government's leading economic indicator index predicting expansion in the first quarter on the back of stronger tourism, stock market and new business indicators; domestic credit still expanding at a double-digit rate; and corporate earnings expected by the market to grow by over 10% this year.
All in all, while there may be higher growth in 2012 and while upside surprises may even abound, there continue to be very potent downside risks on account of the uncertainty about the future of the global economy. Given the unknowns, from moderate growth this year, we are penciling in only a mild upturn in 2013, with GDP expected to grow by about 5%.
THE PUBLIC SECTOR: WAITING FOR AN UPGRADE
The national government's budget gap likely fell below 2% of GDP in 2011 (to about 1.6% in our estimate), or some two years earlier than originally planned by economic managers. The sudden shrinkage of the national deficit traced mainly to the current administration's housecleaning efforts, particularly an overhaul of the government's disbursement procedures that led to initial delays in public spending.
With the startup hitches of good governance reforms over, we anticipate a rebound in public spending this year. Apart from base effects, this belief is bolstered by what appears to be the Budget department's determination to reverse last year's trend. Officials recently announced they have already released nearly half of the budget for 2012, while unspent funds from last year would be carried over to the present period.
This should lead to an increase in the fiscal deficit this year. However, with revenues set to continue growing through administrative efforts, the national government should be able to meet its set deficit target (2.6% of GDP).
The Bureau of Internal Revenue (BIR) performed commendably in 2011, hitting targets despite low economic growth, and will likely be able to maintain its good showing this year. The Customs bureau, in contrast, has been missing its targets (by nearly P60 billion or about 0.6% of GDP) with documented reports of wholesale oil smuggling and of several thousands of containers disappearing, hallmarks of the past administration that remain unchecked today. Clearly, intensifying the anti-corruption drive in this agency and more skilled and experienced leadership could greatly improve the government's revenue haul.
Citing fiscal improvements, the country's economic managers continue to campaign for credit upgrades, where the hope is to see Philippine debt finally gaining investment grade status. Positive developments to this end include S&P's change in outlook from stable to positive and the recent successful borrowing of the Philippine government from the long-term debt market at just 5% or better than the rate fetched by Indonesia despite the latter's newly minted investment grade rating.
We believe a change in credit ratings is likely within the year, though not yet to a lower medium grade rating. Only Fitch currently rates Philippine issues at one notch below investment grade. S&P and Moody's are at two notches below. In any case, traders typically note that Philippine sovereigns have already been trading at investment grade levels, making a credit upgrade or change in outlook basically a catch-up move.
While rating agencies recognize the country's high external liquidity and relatively steady growth, they claim to be still looking for improvements in the fiscal and debt profile, specifically in terms of a steeper downward tilt of the debt trajectory. In our own computation, without a pronounced increase in sustainable revenue sources, the near-term reduction in the public-debt-to-GDP ratio will not be enough for the country to attain levels approaching those of similarly rated peers.
Tax effort has recently also been whittled down by the implementation of several revenue-eroding laws. Unfortunately, with Congress currently very much preoccupied with the impeachment trial of the Chief Justice, we are not too optimistic, at least in the near term, that progress will be made towards passing much-needed revenue-generating legislation, e.g. reform of tobacco and alcohol taxes and fiscal incentives rationalization, that can help bring back the ratio even to recent pre-crisis levels.
This article is an excerpt from the Feb. 11 report written by Margarita Gonzales and this columnist for GlobalSource, New York based network of independent analysts. Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis.
