Managing the growth dampeners

No Free Lunch
By Cielito F. Habito
Philippine Daily Inquirer

Read more: http://opinion.inquirer.net/74983/managing-the-growth-dampeners#ixzz32yn8K8kU
Follow us: @inquirerdotnet on Twitter | inquirerdotnet on Facebook

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.

Read more: http://opinion.inquirer.net/74983/managing-the-growth-dampeners#ixzz32yn2FkTi
Follow us: @inquirerdotnet on Twitter | inquirerdotnet on Facebook

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.)

Public Lives

Moto California

By Randy David
Philippine Daily Inquirer

12:54 am | Sunday, April 27th, 2014

 

LOS ANGELES—After 9/11 and the unraveling of the US financial system that began in late 2008, images of collapse, decay, unemployment, class strife, and paranoia dominated my view of America. But, on this visit, the economic crisis I expected was not immediately visible.  What I saw, in fact, was a country that seemed to be struggling to free itself from forms of technology that had become dysfunctional. For example, commuters rendered immobile in freeways choking with single-passenger cars and monstrous “big rigs.” Here, it is easy to get the impression that modernity has reached a dead end, and technology has produced, not a working utopia, but a self-induced nightmare.

A different picture of the United States, however, slowly unfolds for me from the first moment I take to the streets of suburban California on a motorcycle. It is a Sunday, a perfect day for riding, perhaps anywhere in the world.  But, far away from the sweltering heat in Manila, it is springtime in America. Emerging onto the Brea Canyon road after an early breakfast of oranges, bread and coffee, I am grandly welcomed by a cool breeze, a bright sun, flowering trees, and the clearest of skies.

I am joined on this ride by my youngest brother Goli (age difference: 22 years) and our cousin George Gopiao. Three years ago, when I retired, Goli treated me to a memorable ride along the Pacific Coast Highway, staying in family-run bed-and-breakfast inns and stopping for meals in quaint cafés and the usual burger joints that serve humongous sandwiches and unlimited soda. That trip took us to as far as Merced, a jump-off point to Yosemite Valley. Mechanical trouble and foggy weather, however, prevented us from making the final ascent to Yosemite.

But this time, the bikes are in pristine condition, the weather extraordinarily bright and cool, and we are determined to complete the journey. The plan is to meet up the following day with seven other “bucket-listers” from the Hombres of Manila motorcycle group and their spouses, who, like me, had flown all the way from Manila to do this ride of a lifetime. The meeting point is Cannery Row in Monterey, a place immortalized by the American writer John Steinbeck. The riders and their back-up SUV are coming in from the San Francisco area. We, the “Brea boys,” are coming in from San Luis Obispo, where we spent the night.

Smart phones with their GPS-oriented maps make the navigation and coordination almost effortless. Soon, the Hombres find each other and instantly fill the Monterey air with jubilant Tagalog greetings and the macho growl of liter bikes.

Like a flock of wide-eyed tourists following a predesigned itinerary, we quickly dismount and leave our bikes at a parking lot manned by John, a homesick compatriot who could have been plucked out of Steinbeck’s novels. We assemble for a group photo in front of the Steinbeck monument, and pick a restaurant that serves seafood pasta and the signature clam chowder of American cuisine. The service is slow, but we are in no hurry.

Zeke Covarrubias, our host in Ripon, a small city near Modesto, does not expect us until around 6 p.m. for an early dinner. He and his gracious wife, Hannah, insist that all of us, 14 people in all, spend the night with them. “Mi casa es su casa,” Zeke, who has ridden with the Hombres in the Philippines, warmly tells us. And, what an unforgettable Mexican dinner they lay out for us!  Local riders Josh, Dave, Roy, and Ruthann join us. Their friendship and incomparable hospitality confirm everything that has been told about biker camaraderie.

Ripon is supposed to be only two-and-a-half hours away from Monterey. But it takes us nearly six hours before we finally reach the Covarrubias house. Anxiety floods our hearts when, at a gas station, we realize that we have lost half of our train. The missing group includes the most intrepid of us, Romy Bernardo, who, like me, cannot ride fast in the dark. But, more than that, Romy, who is hobbled by a spinal condition, needs to be able to rest his back after an hour of riding.

As often happens during group rides in unfamiliar terrain, some riders get lost after missing a crucial bend. On US highways, that means desperately looking for an exit that will bring you back to the correct route. Instead of a quick U-turn, you find yourself going a long way around. Frantic calls to their mobile phones go unanswered and we worry. Soon, they pause to make a call. Everyone is safe, but they are somewhere in Fremont, on a road that would take them back to San Francisco! Google Maps informs them where they are, and promptly puts them on the right track to Ripon. As our commander, Eric Mananquil, remembers it: “The final regrouping in Zeke’s garage was the noisiest ever when Romy finally pulled up amid cheers and applause.” He had been on the saddle continuously for over four hours. He’s exhausted but in good spirits. We take it as a good omen.

Wearing the widest grin as he gets off his iron steed, the 58-year-old Romy Bernardo jokingly asks, “Tell me, why do we do this?” And we all laugh, sharing in the ineffable joy of a riding buddy who finds himself testing his personal limits, and passes with flying colors. At that moment, I recall Nietzsche’s tribute to Emerson: “His gracious and clever cheerfulness discourages all seriousness. He does not know how old he is, and how young he’s still going to be.”

Filled with child-like wonder, we mount our bikes the following morning for the ultimate twisty ride to Yosemite Valley. Something about this place tells you how insignificant you are beside Nature, an ever-changing panorama of beauty and danger that science and technology can neither fully decipher nor improve upon.

Read more: http://opinion.inquirer.net/73978/moto-california#ixzz309woLNnf
Follow us: @inquirerdotnet on Twitter | inquirerdotnet on Facebook

Frozen

Introspective

Posted on April 27, 2014 08:14:00 PM

Business World

PHILIPPINE-CHINA relations sank to a new low a few weeks ago following the Philippines’filing of a memorial or pleading before a United Nations Convention on the Law of the Sea arbitral tribunal on March 30. The memorial was in connection with the arbitration case it initiated against China early last year over disputed areas in the South China Sea (West Philippine Sea) in which it sought to defend its rights under the 200-nautical mile exclusive economic zone of the UN Convention on the Law of the Sea (UNCLOS). China has repeatedly refused to participate in the international court case, claiming that its dispute with the Philippines is over territories or islands rather than dealing with maritime issues, thus falling outside the purview of UNCLOS.

While it has rejected external arbitration, China has nonetheless taken to arguing its legal case in the public arena, with a 1-1/2 page paid advertisement in a local paper. In it, China said that the Philippines “seriously damaged bilateral relations” by pushing for arbitration without its agreement while stating its commitment to resolving the disputes through bilateral negotiations. It added that it is within its rights under international law to refuse to take part in the arbitration and that “forcing arbitration will not change the fact that China has sovereignty over the Nansha Islands (Spratly Islands).”

The Philippines, in turn, claimed that after exhausting other avenues to settle the disputes, it was left with no other option but to file for arbitration and let international law clear up each country’s rights arising from the overlapping claims. The hope is that despite China’s current insistence in claiming everything within the nine-dash line, a decision from an impartial international tribunal that is favorable to the Philippines will persuade it to soften its stance, especially with the pressure of world opinion bearing down on it, and allow the Philippines to explore areas within its exclusive economic zone. In response to China’s statement, the President also explained that the Philippines is not out to challenge China but simply to defend its own interests through a peaceful and rules-based means that conforms with international law.

INTERNATIONAL SUPPORT

The Philippine government’s confidence is understandable as, legal arguments aside, the case has ignited latent nationalistic emotions. The country is also enjoying broad international backing, not least from the US given its pivot to Asia, and countries with similar disputes with China, including Japan and some members of the ASEAN (notably, Vietnam and Malaysia). Only the Philippines, however, has chosen to take this legal challenge. The government’s pleading also came within weeks of Russia’s annexation of Crimea, which would explain the US’s firmer statements recently, admonishing China to respect the Philippines’rights to use dispute resolution mechanisms under UNCLOS and telling China that it will stand by its allies in the region, referring as well to Japan.

To be sure, the Philippines’leaning on US support in its maritime disputes has drawn strong reactions from China. It has said that it opposes these attempts to draw a third party into the dispute. But it is precisely the belief in US support -- the two countries hold periodic war games, including some near the South China Sea -- that is propping up Philippine confidence to stand up to China. Lacking any credible military defense capability, the Philippines is currently locked in negotiations with the US on a defense treaty that it expects will be signed during the US President’s scheduled visit to the country this month.

DIPLOMATIC CHILL

Notwithstanding the apparent overwhelming desire among Filipinos for its government to see the case through, not a few local thinkers are dismayed that relations with a neighboring economic powerhouse have deteriorated to such an extent. Both sides are not shy to call each other names -- “troublemaker” Philippines to “bully” China -- and surveys indicate high mutual distrust between the two nations. By all accounts, the case has led to even icier diplomatic relations, especially between the nations’top leaders, with local administration officials acknowledging that “Beijing is not fond of the President.”

While the arrival of a new Chinese Ambassador, who just assumed office this week, can only be positive, his presence is not expected to lead to thawing relations. The Philippines sees China’s increasing and disproportionately strong presence in the disputed waters as a sign of aggression, most especially since the country does not even have minimum credible defense. This is evident in what has been described as a cat-and-mouse confrontation between the two sides recently, with smaller Philippine boats resorting to shallow waters to be able to slip past a China blockade and bring supplies to its servicemen in the Scarborough Shoal.

Many worry that amidst strained relations, any minor skirmish from future similar maneuvers, whether or not provoked by either side, can lead to mistakes that carry high political and economic costs, especially for the weaker Philippines. The fear is that such accidents may provide the hardliners in China the excuse they need to forcibly seize islands now in Philippine possession, without paying a high political price. Analysts agree that the US will not risk its own relations with China to defend the Philippines, especially under such conditions.

Cooler heads also believe that the Philippines needs to dial down the rhetoric, e.g., that the President’s comparison of China’s actions to Hitler’s occupation of Czechoslovakia in the period leading up to the Second World War seemed unnecessary. Rather, more calibrated and thought through pronouncements would enable the country to keep the moral high ground.

As it is, given China’s non-participation in the arbitration case, the Philippines realizes that even under the best case where the tribunal accepts jurisdiction and substantively rules in its favor, the ruling will be unenforceable and China will still have effective control of the disputed areas. Needless provocations would likely serve to harden China’s position, which may prove unhelpful in achieving the Philippines’desired outcome.

ECONOMIC COSTS

Economically, a prolonged diplomatic chill risks underperformance in mutually beneficial trade and travel ties, which have been growing rapidly over the years. Trade statistics show that Philippine-China exports and imports grew at a compounded annual growth rate (CAGR) of 17% between 1999-2013 compared with the 4% CAGR in trade between the Philippines and the rest of the world. Chinese tourists, which the World Tourism Organization tagged as the largest source market for outbound tourism in terms of expenditures since 2012, have only recently started to come to the Philippines and despite bilateral tensions grew 70% to over 420,000 visitors last year. There are also the several thousand OFWs in Hong Kong, which though an autonomous region is still part of China.

China demonstrated during the April 2012 standoff that at a minimum, it can bar Chinese tourists from coming to the Philippines and apply stricter phytosanitary standards on Philippine agricultural exports. Analysts estimate that about 30% of Philippine exports to China is intended for domestic demand, a share that may grow as China shifts towards a consumption-led economic growth strategy.

With a pending court case, one can also expect China to deploy its huge foreign exchange reserves and continue its charm offensive to win over other members of the ASEAN. This would not only isolate the Philippines in its continuing efforts to push for a binding Code of Conduct in the South China Sea among ASEAN members, but would also give the latter the edge in attracting fast growing Chinese outward investments ($84 billion in 2012 from less than $3 billion a decade ago, mostly in Asia). At present, there is very little by way of Chinese FDI in the Philippines, with its one large stake in the electricity transmission sector being eyed locally with deep suspicion. Naturally, it is now highly unlikely that the Philippines can undertake any oil and gas exploration in the West Philippine Sea.

AFTER 2016

Per estimates, it will take anywhere from two to four years for the tribunal to decide on the case, assuming it does not junk it immediately for lack of jurisdiction (i.e., take China’s position). Even if the decision comes before 2016, there is not much optimism among local China experts that bilateral relations will thaw under President Benigno Aquino. The hope now is that in the interim, more pragmatic minds on both sides of the disputed seas will be able to work on preserving and growing economic ties.

(This column was from a GlobalSource special report on April 11, written by Christine Tang and the columnist. Mr. Bernardo is a board member of the Institute for Development and Econometric Analysis and Philippine Advisor of GlobalSource Partners.)

Economic growth may not settle within gov’t target – GlobalSource

By Kathleen A. Martin 
(The Philippine Star) | Updated February 4, 2014 - 12:00am


MANILA, Philippines - Philippine economic expansion may not settle within the government’s 6.5 percent to 7.5 percent target this year, GlobalSource Partners said, amid a lack of new growth drivers.

“All told, the better-than-expected fourth quarter performance brought full year GDP (gross domestic product) growth to 7.2 percent, our pre-typhoon forecast,” Romeo Bernardo, analyst at the New York-based think tank said in a research note.

“Despite this, we remain less confident than other analysts that increased government spending for post-disaster reconstruction will bring 2014 growth above 6.5 percent, especially given its poor spending record recently,” he continued.

Bernardo said there are no expected growth drivers this year, especially as foreign investors flee emerging markets in part because of the prospect of less US monetary stimulus.

“Aside from the start of construction of a couple of PPP (public-private partnership) tollroads, we have yet to be convinced that there are new growth drivers in the horizon, particularly FDI (foreign direct investments),” Bernardo said.

“At the moment, we see increased risk of tighter domestic financial conditions as capital outflows increase which may dent consumer and business confidence,” he added.

Business ( Article MRec ), pagematch: 1, sectionmatch: 1


The central bank expects foreign direct investments reaching $2.6 billion this year, higher than projected $2.1 billion in 2013. Latest data showed foreign direct investments amounted to $3.361 billion as of October last year.

However, foreign portfolio investments are expected to fall to $2.1 billion this year from a net inflow of $4.2 billion in 2013 as volatility remain in global financial markets following the US Federal Reserve’s scaling back of monthly asset purchases.

“Additionally, we are hearing anecdotal accounts of reduced retail sales as consumers cut back spending on expectations of higher electricity bills ahead,” Bernardo said.

Manila Electric Co. (Meralco) in December announced a record-high P4.15 per kilowatt-hour rate hike but the plan has been put on hold by a temporary restraining order from the Supreme Court.

Of the total power rate hike, P2.41/kWh was planned for December, P1.21/kWh for February, and P0.53/kWh for March.

Meanwhile, inflation this year is seen to rise to 4.5 percent, near the upper-end of the central bank’s three to five percent target range.

http://www.philstar.com/business/2014/02/04/1286263/economic-growth-may-not-settle-within-govt-target-globalsource 

PH lacks drivers to grow beyond 6.5% this year, says think tank

By Doris C. Dumlao
Philippine Daily Inquirer

MANILA–The Philippines may lack growth drivers to lift domestic economic growth beyond 6.5 percent this year as post-disaster reconstruction spending may not deliver as expected, New York-based think tank Global Source said.

Despite the better-than-expected fourth quarter gross domestic product (GDP) expansion that brought full-year growth to 7.2 percent, Global Source economist Romeo Bernardo said the think tank remained “less than confident” compared to other analysts that increased government spending for post-disaster reconstruction would bring 2014 growth above 6.5 percent.

The research cited the government’s “poor spending record” recently, he said.

“Aside from the start of construction of a couple of PPP (public private partnership) tollroads, we have yet to be convinced that there are new growth drivers in the horizon, particularly FDI (foreign direct investments),” Bernardo said in a research note.

“At the moment, we see increased risk of tighter domestic financial conditions as capital outflows increase which may dent consumer and business confidence,” he said.

Bernardo also cited anecdotal accounts of reduced retail sales as consumers cut back spending on expectations of higher electricity bills ahead.

With a 6.5 percent GDP growth in the fourth quarter, full-year growth reached the top-end of the government’s revised forecast, confirming its assessment of SuperTyphoon Yolanda’s limited growth impact, the research noted.

Apart from the overall growth rate, Global Source said the good news from the fourth quarter GDP economic report card included stable, albeit slower, consumption growth (5.6 percent), double-digit growth in investments in durable equipment (15.5 percent) and continuing growth in exports of both goods and services (6.4 percent).

At the same time, he said the supply side showed continuing healthy service sector growth (6.5 percent) and accelerating manufacturing value-added (12.3 percent).

“On the other hand, weakness in public spending, which we warned about, is revealed in year-on-year declines in government consumption (-5.2 percent) and construction (-1 percent),” Bernardo said.

“Troubling as well is the 0.4 percent dip in private construction which followed last quarter’s growth slowdown to single digit, albeit this also reflects some base effects due to the impressive growth last year,” he added.

Meanwhile, Bernardo said the slow growth in goods imports (1.1 percent) was “puzzling” until his firm was reminded of reports of continuing smuggling, especially of oil.

Read more: http://business.inquirer.net/162902/ph-lacks-drivers-to-grow-beyond-6-5-this-year-says-think-tank#ixzz2sVoJgbs3 

The way forward for the power industry

BUSINESS WORLD

Introspective

THE RECENT sharp spike in power rates led to the understandable shock and anger of consumers; most are unfamiliar with the structure and workings of a now market-based power industry. Headline news and public discourse have generated more heat than light. It can be satisfying to embrace conspiracy as a short-cut to thinking about a complex subject which the ideologically opposed to privatization are quick to fan.


What is emerging though from various congress hearings and submissions to the Supreme Court, is that this temporary two month spike was a product of a most unlikely and unfortunate perfect storm of planned and unplanned plant outages on top of already thin reserves. And what failures there were arose not from collusion, but from a bid and offer system that requires further refining, and perhaps, from insufficient diligence.

By way of disclosure, I was Undersecretary of Finance during the last two years of Aquino 1 and the first four years of Ramos administrations, an independent director in one major publicly listed power company and in an unlisted diversified holding company active in the energy business. While in government, I was involved in trying to addresss crippling blackouts in the early 1990’s that led the government to contract Independent Power Producers (IPPs) as part of the solution. Quick solutions had to be found -- the most expensive power was no power. Due to the outages, GDP flatlined for two years, 1990/92, lost output of P800 billion in today’s prices, equivalent to twice the cost of government’s infrastructure budget last year, or 20 years of its conditional cash transfer program. This is not even counting investments that were driven away, and the country’s lost momentum.

I resurrect this dark episode in Philippine economic history as a background to what may ensue if counterproductive actions are taken that lead to underinvestment yet again in power generation. Under the Electric Power Industry Reform Act (EPIRA; 2001) it is private sector players who are expected to deliver electricity under a competitive playing field, with government providing the enabling environment. This national policy was not arrived at willy-nilly but after seven years of debate both within the executive department and in Congress, with the active participation of all affected publics.

Modelled after successful privatizing countries, EPIRA was a recognition of the fiscal and institutional limitations of government in building and running power assets efficiently. As we know, such led to costly under-provision during the blackout years, and expensive stranded costs when the long-term growth forecasts failed to materialize post 1997 Asian Crisis.

Today many questions have been raised on whether EPIRA was a success. I submit that, while there has been a delay, a fair call is “so far, so good.” EPIRA has provided the framework for the restructuring of the Electric Power Industry, including privatization of National Power Corp.’s assets, defining the responsibilities of various government agencies and the private sector, and transitioning to a functioning competitive structure. The end goal was to make sure we had an ample and reliable supply of electricity, at reasonable and competitive rates.

What has happened since EPIRA was passed?

1. Privatization of the Power Sector Assets and Liabilities Management Corp. (PSALM) assets began with a slow start, but started to gain traction in 2006. To date 80% of the country’s generating plants have been sold, and a slightly lower number of contracted capacity has been privatized through IPP administrators. Transmission is now under a regulated private company. From less than a handful, there are now over a dozen players in the industry, including heavyweights like San Miguel, Metro-Pacific, Ayala, the Metrobank group, DMCI, and Filinvest, who were never in the power business before.

Where privatization took place, expansion and rehab of existing assets were done -- increasing capacity and improving reliability (eg. Magat, Pantabangan, Binga hydros).

2. WESM/PEMC (Wholesale Electricity Spot Market/ Philippine Electricity Market Corp.) was established and is now a fully functioning trading platform. This is crucial in a market based system, providing an outlet for excess supply, and valuable signals for efficiency in despatch and for new investments.

3. Performance Based Rate setting was introduced and on the way to reaping the gains from replacing a backward-looking return on rate base tariff regime to one which provides strong incentives to improve efficiency and service quality, forward looking capex over a regulatory reset period, and benchmarking utilities against each other.

4. Open access was introduced last year after long delays. This is crucial to developing a competitive market. The thresholds now of 1 MW and above represents around a quarter of the Meralco and Visayan Electric Co. (Cebu area) service area total demand. This will bump up to 40% once the threshold is brought down to 0.75 MW.

5. EPIRA removed one of biggest sources of public debt burden and contingent macroeconomic risks. This was an important factor to our investment rating upgrade -- and lowered borrowing cost for government and private sectors alike, and helped improve overall economic performance.

A common complaint has been that under EPIRA, power rates have actually gone up faster, and that, as a consequence, we now have the highest power rates in the region. While it is true that our rates are higher than our neighbors’, this is because substantial subsidies have been removed as mandated under EPIRA so that “true cost of power” is adhered to while our neighbors continue to subsidize.

For example, Indonesia, Malaysia and Thailand have large oil and natural gas deposits and do not charge royalty on local sales. In contrast, the Philippines collects a royalty of about P1.46 per KWH of our own natural gas. Moreover, fuel prices for Malampaya and geothermal resources are indexed to international fuel prices. In a recent column, Boo Chanco estimated that around P3 of the average Meralco electricity charge is on account of government take.

According to a recent US Agency for International Development (USAID) study (“Challenges in pricing electric power services in selected ASEAN countries, 2013”) the fastest growing component of electricity rates is taxes -- zoomed by a compound annual growth rate of 65% from 2004-11. Once stripped of this and other adjustments, electricity rates only grew by 5.3% annually during this period, around the same as general inflation and cost of fuel. That is to say, tariffs net of taxes stayed constant in real terms, and for many under open access, actually dropped.

I do not disagree, however, that EPIRA has yet to fully deliver on its promise, as the recent black swan rate hike event and the shortages in Mindanao illustrate.

The right course though is not to turn back, but to go forward without further delay to complete its full implementation. And to execute better.

Some thoughts-

1. Government needs to be more active in encouraging generation and supporting private power developers in every way. The appetite to invest is there but developers are running into road blocks with “not in my backyard” advocates and unsupportive government units (eg. The 600MW RP Energy in Subic is two years delayed, now pending judicial resolution of the writ of Kalikasan).

2. Continue to lower the threshold of Open Access so end users can make their own choice of power suppliers. Generators can look at end users as a competitive market, and thus by-pass distribution utilities, the monopoly segment of the power industry.

3. All distribution utilities and coops can be made to contract 100% of their requirements for their “captive market” (i.e. those not under Open Access) to ensure this segment of the market does not carry the brunt of thin reserves through volatile and higher tariffs.

4. The National Electrification Administration (NEA) needs to provide guarantees with automatic remedies, like a bond or L/C that can be drawn to make some rural electric cooperatives credit worthy. This will need to go hand in hand with NEA exacting financial and management disciplines on erring co-ops. And stronger political will to cut-off recalcitrants. This and item (3) will also ensure there is no under-provision by Gencos for the system as a whole because deadbeat co-ops are netted out in their demand forecasts, resulting in thin reserves.

5. The Energy Department and Energy Regulatory Commission (ERC) have to be proactive in managing the market, including ensuring that the systems operator National Grid Corporation of the Philippines (NGCP) fully contracts what the system requires. The establishment of a reserve market has been long delayed.

I end this column with two notes. First, on the implementation of EPIRA -- we have no choice but to move forward -- we cannot put the toothpaste back into the tube.

Second, on the recent suspension of payments to Meralco and operators of Gencos -- this is “a gift to the Filipino people” as headlined only if the law of supply and demand has been suspended in the Philippine islands. What actually needs to be done is to de-risk the sector from political and regulatory uncertainty to make the market work and encourage more investments, yielding more competition, ample supply and reasonable, less volatile tariffs.

(The author is a board member of the Institute for Development and Econometric Analysis and Philippine Advisor of GlobalSource Partners, a NY-based network of independent analysts.)