Managing the growth dampeners

No Free Lunch
By Cielito F. Habito
Philippine Daily Inquirer

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Last week, I cited seven drivers that could keep our economy’s full-year growth above 7 percent this year and next. Space constraints kept me from balancing off the analysis with offsetting growth dampeners, so I will address those downsides this time. Let me state at the outset that notwithstanding these, I remain optimistic that the economy can breach the seemingly conservative forecasts, hovering around 6.0-6.5 percent, being announced by various institutions. But this will not come without some extraordinary effort on the part of government, especially now that everyone’s eyes are on what it would do in its final two years in office.

My friend and fellow economic analyst Romy Bernardo, who produces Philippine economic forecasts for Global Source, doesn’t share my optimism. He has engaged me in a friendly bet (with a free lunch—if there’s such a thing—at stake) that growth this year would be “just a shade above 6 percent,” consistent with estimates I’m seeing from most analysts of late. In his BusinessWorld column yesterday, he cites five growth dampeners that lead him to be more circumspect: (1) delays in public typhoon reconstruction, (2) the daytime ban on trucks in Manila that is disrupting port operations, (3) a potentially damaging El Niño weather disturbance by midyear that can extend to early 2015, (4) still tentative recovery in goods exports, and (5) an impending tightening of monetary policy.

Of the five, El Niño, which is marked by a periodic significant rise in sea surface temperatures, may well be the least avoidable. State weather authority Pagasa has already monitored significantly higher sea surface temperatures in April. It warns of drier conditions, decreased rainfall and possibly stronger storms as El Niño manifests its presence in June. In our last severe El Niño episode in the latter half of 2009 through early 2010, full-year agriculture production dropped by 0.7 percent and 1 percent in those two years, respectively. Note, though, that this did not stop us from achieving a hefty 7.3 percent gross domestic product (GDP) growth in 2010, propelled by 12.1-percent and 7.1-percent growth in industry and services, respectively. With another El Niño episode widely anticipated this year into early next year, deliberate moves to mitigate its effects on agricultural production can already be taken. For example, in anticipation of the severe 1997-98 El Niño episode, the Ramos administration consciously undertook water-impounding projects in the most vulnerable parts of the country.

Bureaucratic inertia may so far be holding back typhoon-related reconstruction and rehabilitation activities, which I identified as one of the peculiar growth drivers this year. But this is not something we cannot overcome; we just need to get our act together. The same can be said on the truck ban issue. Resumption of more normal export markets would be a bonus, but again, shrinking exports in the first half of 2013 never stopped us from being the fastest-growing economy in Asia at the time. Meanwhile, tightening the money supply is entirely the call of the Bangko Sentral ng Pilipinas, which can avoid it if the more direct causes of rising inflation could be effectively addressed.

Could we again breach 7-percent economic growth this year, then? I’d say we can if government can act swiftly and decisively to ensure that the above factors will not be an impediment to achieving such growth. We must overcome start-up difficulties and crack the whip on the various government entities involved in the Yolanda reconstruction program, especially with the typhoon season again fast approaching. We must find a satisfactory solution to the truck ban conundrum that will keep commerce promptly flowing normally again. We must redouble efforts to diversify our export portfolio to further reduce overdependence on unstable electronics for our export earnings. We must address the cost-side causes of recent price increases, to preclude having to tighten money supply to the point of stifling growth. And we must already put in place necessary countermeasures against potential El Niño-induced droughts.

Is it quixotic on my part to talk about 7-percent growth, and up this year and next, when most official forecasts are saying 6 percent-6.5 percent? Well, consider the following: Early last year, the International Monetary Fund saw our 2013 growth at 6 percent, after initially predicting 4.8 and upping it later to 5 percent. The Asian Development Bank placed our growth outlook at 6 percent for both 2013 and 2014. The World Bank had forecast 6.2 percent (it raised this to 7 percent by October, but cut it again to 6.9 percent in December). The United Nations projected 6.2 percent; HSBC said 5.9; Banco de Oro had 6.5; Global Source initially said 5 percent, then upped it to 6.1; and the Focus Economics consensus forecast as of early last year was 5.6 percent. Government’s official 2013 projection was 5.5 percent-6.5 percent. In the end we got 7.2 percent, well beyond everyone’s forecasts.

I still clearly recall how back in the 1990s, when President Fidel Ramos’ dynamic leadership had the Philippine economy riding high, we at the National Economic and Development Authority were constantly seeing our annual growth targets being overshot. Have we simply become too accustomed to expecting less of ourselves, and have yet to get comfortable with the new reality that we can in fact do much better, even as we have in fact been doing so since 2010?

Romy and I do agree on one thing: There remains much for government to do, especially if I am to win our little bet. And it’s a bet he says he’d love to lose.

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Growth and infrastructure imperatives

Introspective, Business World
Posted on May 25, 2014 09:02:06 PM
Romeo L. Bernardo


FORMER economic planning secretary and friend Ciel Habito and I have a lunch bet on the forecast GDP growth for this year. He is looking at a number north of 7%; we, just a shade over 6%. He wrote up a strong case for this in his column (“Seven Growth Drivers in 2014,” No Free Lunch, PDI, May 20).

This is one time I would love to lose, but can’t bring myself (yet) to upgrade our number to 7 -- despite the wave of positive feelings buzzing around, particularly at the recent World Economic Forum for East Asia (WEF-EA). However, reports of delays in public typhoon reconstruction, the daytime ban on trucks that is disrupting port operations, warnings of a potentially damaging El Niño weather disturbance by mid year that can extend to early 2015, still iffy goods export recovery, and the start of monetary policy tightening suggest that growth may be more modest, especially for the first quarter.

I do agree with Ciel and others that the Philippine economy has the potential to grow by more than 7% over the medium term. To get there, the resounding advice to government authorities during the WEF, is this: Infrastructure, infrastructure, infrastructure.

Let me share some thoughts, as a former Finance undersecretary, and adviser/independent director in firms participating in PPP (public-private-partnership) projects who is called to provide occasional policy advise for multilateral agencies.

1. Our poor infra weighs heavily on the creation of more jobs and a better quality of life for our people. Academic studies point to the value of connectivity to bring people and goods to the market economy for growth and inclusiveness. International competitiveness surveys says we are the ugly belle in the ball because we have bad ports, airports, road networks, mass transport, logistic chains, etc.

2. The good news is that at this time -- in contrast to where we were the past two decades -- fiscal constraints and financing are no longer issues. Thanks to a combination of reforms taken over the years on the fiscal side -- most recently sin tax reform -- and a favorable macro environment -- high global liquidity and a structural current account surplus fed by high remittances and BPO (business process outsourcing) earnings -- we are now a net creditor country with improved debt ratios and an investment grade rating with access to long term financing matched to long gestation infra projects.

3. In the past, fiscal costs and risks loomed large in the minds of policy makers because of high profile projects with apparent large budget impact. Consider the oft cited stranded cost on power when demand did not eventuate because of the Asian Crisis. What is not fully appreciated is the much higher economic cost by far of under-provisioning. GDP flat-lined in 1991/92, representing opportunity costs equivalent to 4% of GDP annually for two years. Around P800 billion in today’s prices, equivalent to twice the government’s infra budget last year. A JICA study estimated the daily cost of poor transport conditions to be P2.4 billion a day in 2012; annualized its P850 billion or 8.5% of GDP!

4. The balance of risks has clearly moved away from fiscal risks to one of risks -- no certainty! -- of costly under-provision of infrastructure. And yet the pace in which projects are approved and implemented, including inaction on unsolicited projects both already signed and in the pipeline, the risk allocation between government and private sector being done in the structuring of projects (which earlier loaded risks like real estate taxes on the private sector) suggests continuing timidity that emanates from the top in some of the agencies.

5. While there has been progress in building a pipeline, most of these are still in study stages. Actual biddings done are few and far between, and seem in general not to have attracted enough bids primarily because of poor cost and risk allocation. I subscribe to the view that provided processes are transparent and competitive (including for Swiss challenges for unsolicited projects), government and the public sector get full value for the contingent risks government assumes, either by way of higher upfront concession fees it receives, or lower tariffs, depending on government’s bid parameter (which reflects what government is trying to optimize).

6. From where we are, there is high expectation that doing the first one for each of the sectors creates a model that makes it easier for succeeding ones, and for the program to ramp up quickly. The somewhat ambitious targets for 15 projects to be rolled out for the rest of the administration’s term seems to reflect this. Also the target of 5% of GDP in infra by 2016, from only half that presently. But time is running out.

7. There are a number of things government can do to help make sure this happens.

a.) Greater certainty in viability gap funding support. Right now, this is provided in the budget under the Strategic Support Fund on a per agency basis with a lapse of one or two years. In other countries, such support is provided via a continuing flexible and fungible dedicated fund open to all PPP projects meeting certain criteria.

b) Contingent liability fund. Likewise provided through an unprogrammed item in the budget and suffers from the problem of lapsing every year, and therefore does not protect investors over the contract life of the PPP. Perhaps this can evolve into a revolving fund where implementing agencies are forced to contribute a percent of their budget annually and upon which contingent liabilities called will be paid.

c) Firmer national government support in addressing bottlenecks that are thrown in the way of infra implementation -- from right of ways, to hostage taking by local governments, and opposition by not-in-my-backyard activists. A good example here is the four year delayed 600 mw power project in Subic that should have now been contributing to addressing the consumer and economy costly thin power reserves.

d) Greater regulatory certainty. This is best highlighted in the case of the MWSS PPP, earlier hailed by the Finance Secretary as a most successful privatization. After a very high profile public pillory, this is now under international arbitration. MWSS is re-interpreting the treatment of corporate income taxes, 16 years after the signing of the contract. Similar regulatory unease is clouding EPIRA (the Electric Power Industry Reform Act of 2001) with the recent ruling by the ERC (Energy Regulatory Commission) backward adjusting spikes in rates of the WESM (Wholesale Electricity Spot Market) on grounds of market failure, something the generation companies are contesting. There are also efforts to issue new stricter guidelines under the Performance Based Rate Setting, including disallowing revaluation of assets and a heavier role of ERC in approving bilateral contract tariffs -- effectively rate setting power over generation, the competitive segment of industry. This is on top of agitation to revamp the EPIRA law, which as business organizations uniformly declared, risks funding for much needed power projects if acted upon.

This situation of trying to keep rates low is present also in mass transport. For MRT 3, despite the clear case that has long existed for increase in tariffs, these have remained where they were since opening a decade and a half ago, at less than a third of full recovery tariff, and much lower even than what commercial buses are charging. In this case, it is the government, or, if you will, the larger tax-paying public including non-Manila residents, who are carrying these costs.

While the objective of government to keep tariffs low and affordable is fully understandable, we should be clear minded as well on the consequences that politicized, unstable policies have on PPP’s ability to contribute to addressing the infra misery. At the end of the day, from a public welfare standpoint, what is the most expensive, power, water, mass transport? Not having any. This is economically costly, having an impact on investments, jobs and quality growth. It should be made politically costly too.

(The author was Undersecretary of Finance in the Aquino 1 and Ramos administrations and is a Board Trustee of the Institute for Development and Econometric Analysis.)