Economic Significance of Banks

*with snapshots of the Philippine economy

Despite typhoon Yolanda (Haiyan) and a string of natural disasters throughout 2013, the Philippine economy managed to grow at a remarkable 7.2%.

Higher growth in 2013 was underpinned by the strong performance of consumption and services, and supported by the expansion of investment and manufacturing. Growth in 2013 was the highest among the ASEAN-5 countries and was nearly at par with China.

In 2013, private consumption, fueled by remittances from abroad, grew by 5.6% and contributed to overall growth. All major components of private consumption expanded by at least 5%, with the exception of tobacco and alcoholic beverages, which barely grew at 0.4%. The implementation of the Sin Tax Law appeared to have reduced the consumption of these products.

The services sector remained the main engine of growth while manufacturing provided the boost.

The resilient growth of trade, financial intermediation, and real estate and other business activities, which include the booming business process outsourcing industry, supported the robust growth of the services sector.

The strong domestic demand for food, chemical products, furniture and fixtures, communication equipment, basic metal products buoyed the manufacturing sector’s expansion despite the negative growth in textile, garments, petroleum and other fuel products, and transport equipment.

Agriculture barely contributed to growth as production of major crops, such as corn, coconut, sugarcane, and banana declined.

The link between financial development and economic growth has been the subject of extensive research in recent years.

Superior access to local information, greater commitment to local prosperity, differences in costs and risk management, and competition policy could explain the specific influence of such type of banks on local economic development. In developing countries where economic development is hampered by insufficient and inadequate access to financial services in rural areas, local banks could improve financing opportunities to small and medium size enterprises and favor entrepreneurship.

Macroeconomic conditions and political governance (i.e., monetary and exchange rate policies, banking regulations, education and health policies, industrial policies) are relatively homogeneous among all the regions as laws and policies are predominantly applicable to the entire country.

The Philippines also has a bank‐based financial system as evidenced by the limited presence of equity markets as source of finance (Gochoco‐Bautista 1999) and mainly for large corporations. Hence, funding for the majority of economic activities is expected to be sourced primarily from banks and not through financial markets (Gochoco‐Bautista, 1999; Asian Development Bank, 2007).

After recording strong growth in the last 2 years, Philippine economic growth decelerated to 5.7 percent in the first quarter of 2014 (Q1 2014). On the supply side, the services sector continued to be the main driver of growth, contributing 3.8 percentage points to overall growth, while agriculture remained weak. On the demand side, growth continued to be led by private construction, and to some extent, durable equipment, and infrastructure spending. Moreover, the recovery of net exports after 5 quarters of contraction contributed to growth. (http://www.worldbank.org/)

The Philippines can sustain high growth by accelerating structural reforms and increasing investments in infrastructure and in the health and education of the Filipino people.