Special Issues in the Administration of

Economic Development

Josefina B. Bitonio, DPA

DPA 314

Philippine Economic Update

Structural Policy Country Notes: Medium-Term Policy Challenges

• Many Southeast Asian countries are searching for “new growth and development strategies” The global financial crisis has underscored the need for Asian economies to rethink their past growth models. The export-oriented growth strategies, successful in earlier decades, have shown their weaknesses. Excessive dependence on external demand has made many Asian countries vulnerable to fluctuations in global demand and to other external shocks.

OECD, 2014

Structural policy country notes: Medium-term policy challenges

• Many Southeast Asian countries are now searching for new growth and development strategies which are more focused on domestic demand and better adapted to changing international market conditions. Policy makers in the region recognize the need to adapt their development strategies and indeed have included several new elements that reflect a shift towards a new growth model in their medium-term development plans.

OECD, 2014

• These elements include human capital development, social and labor market policies, policies to promote greener economies and policies to address economic and social disparities. Implementation of the new development strategies will require the adoption of a comprehensive package of reform measures. Overall, enhancing productivity through structural policy reforms will be key to the success of the new development strategies in the region.

OECD, 2014

• Higher growth was underpinned by the robust performance of consumption and services, and supported by the expansion of investments and manufacturing. As in previous quarters, sustained inflow of remittances fueled private consumption, which grew by 5.6 percent. Private construction increased by around eight percent, supported by low interest rates and strong demand for office and residential spaces by the booming business processing outsourcing (BPO) industry and its 900,000-strong workforce

OECD, 2014

• According to WB Report (2014), Despite Typhoon Yolanda and a string of natural disasters throughout 2013, Philippine economic growth accelerated to 7.2 percent in 2013 and bringing full year growth to 5.8 percent in 2015. Underlying this remarkable growth are the country’s strong macroeconomic fundamentals which continued to support domestic demand and shield the economy from the persistent weaknesses of the global economy.

Strong Macroeconomic Fundamentals

• What exactly are macroeconomic fundamentals anyway? They include unemployment, GDP, inflation (consumer price indices), interest rates and fiscal and monetary policy and balance of payments.

Wootton, 2015

• Improved efficiency of public infrastructure spending also contributed to higher growth. Exports, while improving, remained lackluster, given slack demand for electronic products. On the production side, both the services and manufacturing sectors were drivers of growth.

• Like other emerging markets, Philippine financial markets experienced large volatilities as investors responded to the tapering of the US stimulus program. Stock and bond prices fell significantly in June, August, and December 2013. In August, when volatility was most pronounced, the Philippine Stock Exchange index lost nearly 30 percent of its value (peak to trough), while bond prices fell by 20 percent. The outflow of portfolio investment contributed to the peso’s 12-percent nominal depreciation by year end. However, confidence in the domestic economy remained high and the country was globally recognized with a third credit rating upgrade to investment grade

• Monetary and fiscal policy remained supportive of growth. In 2013, Consumers Price Index (CPI) inflation eased to three percent, equivalent to the low end of the central bank’s inflation target of three to five percent. With low and stable inflation, policy rates were kept at historically low levels of 3.5 and 5.5 percent for the overnight borrowing and lending rates, respectively. Government finances continued to improve, thanks to improvements in tax administration and spending efficiency

• Public spending was supported by strong growth in infrastructure spending despite slowdowns in other spending categories. Revenue collection grew by about 12 percent, driven by improved tax administration and incremental revenues from the “sin tax.” Further public finance reforms are underway. These include rationalizing fiscal incentives, improving customs administration, and enhancing the accountability and transparency of the budget through the reform of budget execution.

• Moving forward, the country needs to continue focusing its attention on generating higher, sustained, and more inclusive growth—the type that creates more and better jobs and reduces poverty. With good jobs, Filipinos can increase their income, save more, and invest for the rainy days, thereby reducing vulnerabilities to calamities

• The World Bank recently released the draft of the Philippine Development Report (PDR) “Creating more and better jobs” for public discussion. The report argues that the challenge of sustaining growth and creating more and better jobs will have to focus on raising the productivity of the majority of the country’s workers, in particular farmers and MSMEs.

• More and better jobs can be created by accelerating reforms to protect property rights, promote more competition, and simplify regulations, while sustainably ramping up public investments in infrastructure, education, and health. However, fiscally sustainable increases in investment levels are only possible through a combination of more efficient government spending and increased revenues from new tax policy and improved administrative measures.

• With these reforms, the private sector will have the incentive to invest more and create jobs, and the country can attract more investments as the economic rebalancing in the world’s most dynamic region takes place. An initial assessment of a new dataset on trade in value-added suggests that the Philippines is well-positioned to further enhance its participation in the region’s supply chains

• To increase the chances of success, broad reform coalitions — that is, multi-sectoral groups composed of many interests that can address diverse options at the national or local levels — are crucial. Locking in good governance and translating it into inclusive growth can only occur if government, business, and labor, supported by civil society, agree on a practical agenda for job creation for all Filipinos.

• The Philippines is one of the most dynamic economies in the East Asia region, with sound economic fundamentals and a globally recognized competitive workforce. Growth in the Philippines has been on average above 5% in the past decade, significantly higher than in previous decades.

• The Philippines has a status of emerging economy. In recent years, the country has been steadily growing mainly due to inflow of foreign direct investment and remittances. The Philippines is the world’s largest center for business process outsourcing. The country also has a strong industrial sector based on the manufacturing of electronics and other high-tech components for overseas corporations. The Philippines is rich in natural resources; it has significant reserves of chromite, nickel, copper, coal and oil.

Fast Facts about the Philippine Economy

• The performance of the Philippine economy in 2012 and in the first quarter of 2013 indicates that it is moving along a higher growth trajectory. From the 3.6 percent growth recorded in 2011, the Philippines’ GDP grew by 6.8 percent in 2012 and by 7.8 percent in the first quarter of 2013. The first quarter growth of 2013 is the highest growth rate recorded under the Aquino administration, and is faster than that of China’s, Indonesia’s, Thailand’s, and Vietnam’s for the same period.

• Remarkable growth was achieved alongside a slowdown in the increase in prices of basic commodities.

The retail prices of basic and prime

commodities remained below their suggested

retail prices and most have not increased in the

past three months, according to the Department

of Trade and Industry (DTI, 2015).

Read more: http://business.inquirer.net/185456/prices-of-basic-goods-

remain-unchanged-says-dti#ixzz4A4gsAY5L

• The full-year average inflation rate for 2012 was at 3.2%—the lowest recorded inflation rate in five years and lower than the average inflation rates in Indonesia, Singapore, India, and Vietnam. Average inflation for the first half of 2013 was at 2.9%, which is at the lower than the 3% to 5% target for 2012 to 2013.

Philippines Inflation Rate at 7-Month High

Philippines annual inflation rate rose 1.5 percent in

December of 2015

http://www.tradingeconomics.com/philippines/inflation-cpi

Reflection

• Inflation is at a low level, GDP is growing at Olympic gold-medal levels, interest rates are low (only 36 percent to 48 percent a year for credit card interest!) and fiscal and monetary policy is on a tight rein. So if the macroeconomic fundamentals are really strong, why is the job market not reducing the unemployment numbers significantly, if at all?

Wootton, 2015

• There have been 92 record highs in the Philippine Stock Exchange Index since July 2010, the most recent record closing registering on May 15, 2013 at 7392.20 points.

Two days after the country's elections, the

Philippine Stock Exchange index (PSEi) gained

221 points or 3.09% to close at 7,369.52. All

Shares also surged by 116.07 points or 2.72%

to 4,388.31

http://www.rappler.com/business/economy-watch/132739-philippine-

stocks-elections-rodrigo-duterte

• The World Economic Forum increased the ranking of the Philippines in the Global Competitiveness Index, from 85th place in 2010 to 65th (out of 144 countries) in 2012—two consecutive 10-place jumps

WEF ranked the Philippines as the 47th most competitive

country in the world, out of 140 economies. When

grouped according to the WEF's productivity "pillars," the

country received its highest rank in macroeconomic

environment at 24th place, and its lowest rank in

infrastructure at 90th place.

http://cnnphilippines.com/business/2015/09/30/philippines-climbs-5-

places-in-wef-competitiveness-ranking.html

Infrastructure at 90th placeThe bureaucratic nightmare that all but kills off any

development investment also inhibits the government’s own attempts to spend and develop investor-attractive infrastructure. If there were a strong will to undertake development investment and through that attract more private investment, then it could be made to happen at the expense of using some of the “security money” sitting doing nothing in the government’s coffers as well as the risk of opening up some of the almost impossible to satisfy procedural requirements.

Wootton, 2015

• If the government leads with a strong will, the private sector will follow but, for now, the private sector can’t seem to think of too much to do beyond developing land, where opportunities are severely limited, thanks to a lack of decent transportation infrastructure itself leading to overbuilding and unrealistic price levels [not to mention the awful traffic snarls] in those areas that are accessible.

Wootton, 2015

Infrastructure at 90th place

Singapore was ranked the most competitive Southeast Asian economy, at 2nd place in the overall index. Five other Southeast Asian states ranked in the upper half of the standings:

• Malaysia: 18th• Thailand: 32nd• Indonesia: 37th• Philippines: 47th• Vietnam: 56th

"With the exception of Thailand, all five have improved their showing since 2007, most notably the Philippines, which has leapfrogged 17 places," the WEF noted.

http://cnnphilippines.com/business/2015/09/30/philippines-climbs-5-places-

in-wef-competitiveness-ranking.html

• Foreign direct investments (FDI) grew by 54% from USD1.8 billion in 2011 to USD2.8 billion in 2012, outpacing Malaysia, Indonesia, Thailand, and Singapore.

2011 2012 2013 2014

2,007,150,725 3,215,415,155 3,737,371,740 6,202,380,556

Source: http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD

• The Philippines has committed to provide up to USD1 billion in loan resources under the bilateral borrowing facility of the International Monetary Fund.

• The BSP’s commitment of US$1 billion to the IMF shows our support to the global efforts in stabilizing the world economy and maintaining its growth path. As a member of the global community of nations, it is also in our interest to ensure economic and financial stability across the globe.

• Merchandise exports grew by 7.6% from USD48.30 billion in 2011 to USD51.99 billion in 2012, the highest recorded export earnings in the country’s history amid adverse global developments.

• Moreover, total merchandise exports for the year 2015 registered a 5.6 percent drop, that is from $62.102 billion in 2014 to $58.648 billion in 2015

https://psa.gov.ph/content/merchandise-export-performance-december-2015#sthash.biOmXE6s.dpuf

• Recent estimates suggest that extreme poverty decreased gradually between 2012 and 2014. Extreme poverty is estimated to have decreased from 10.6 percent in 2012 to nine percent in 2014. After a decrease of only 0.3 percentage points between 2009 and 2012, poverty fell more rapidly between 2012 and 2014, according to revised purchasing power parity (PPP) estimates. However, high rates of structural poverty remain, especially among households depending on agriculture.

• Data from the Philippine Statistics Authority (PSA)’s Annual Poverty Indicators Survey (APIS) showed that poverty incidence among Filipino individuals rose by 1.2 percentage points to 25.8 percent in the first semester of 2014 from the 24.6 percent registered in the first half of 2013.

Demographics of Philippines

Population 100,981,437 (2015 census)

Reflection• The Philippines is not a “poor” country, given an

annual government budget of more than P3 trillion, remittances from overseas Filipinos of about P9 trillion a year and the highest tax rates in Asia. But the government finds it so difficult to spend its money, seemingly preferring to hoard it like the Chinese people in order to gain glowing compliments on its macroeconomic fundamentals, fiscal and monetary policy and protecting the value of the peso. No matter unemployment figures, high interest rates (yes they are high, and will remain so), lack of infrastructure, poverty incidence and the drive to get work abroad.

Wootton, 2015

“The phrase “our strong macroeconomic fundamentals” is frequently repeated, most recently as the safeguard against the effects of changes in the US dollar/peso exchange rate. I find the claim a bit baffling really. This sort of statement along with quotes, including one from the World Bank recently that the Philippine economy has grown miraculously, conflicts with unemployment, poverty, low levels of government spending and foreign investment statistics. There is an apparent dramatic disconnect”.

Wootton, 2015

if the macroeconomic fundamentals are really strong,

why is the job market not reducing the unemployment

numbers significantly, if at all?

• what kinds of elements will be important for the new development strategies in the Philippines; and how does the country incorporate its new development model into its medium-term plans?

• The government should start spending money, wisely and strategically. Spend government money to create jobs and build infrastructure, which then attracts investment, creates more jobs and lowers poverty incidence. The private sector, even in regulation-captive Philippines, is not going to do all this by itself as it has no formal right to do so and you just never know when the government may wake up to its responsibilities.

Wootton, 2015

• The major policy challenges the Philippines faces in its Medium-Term Development Plan are to improve its road infrastructure, increase access to education and development resources, and ensure jobs for all. Both road transport and power are critical to achieve a more closely integrated Philippine economy, thereby helping to attract private-sector investment. Increasing secondary school enrolment and improving the standards of teachers and pupils are vital reforms, without which there can be no adequate human and economic development or job creation

OECD, 2014

The Philippines economy grew an annual 6.9 percent in the March quarter of 2016, accelerating from an upwardly revised 6.5 percent expansion in the previous three months and above market consensus of a 6.6 percent growth. It is the strongest expansion since the September quarter 2013 as a faster increase in household spending and investment offset a slowdown in government expenditure and exports.

The incoming administration of President-elect Rodrigo Duterte plans to achieve annual economic growth of 7.0 to 8.0 percent.

References

Organization for Economic Co-operation and Development (2013) Southeast Asian Economic Outlook 2013 WITH PERSPECTIVES ON CHINA AND INDIA Narrowing Development Gaps

https://www.oecd.org/dev/asia-pacific/Pocket%20Edition%20SAEO2013.pdf

World Bank (2014) Philippine Economic Update. Pursuing Economic Growth Through Sustainable Reconstruction and |Job Creation

• Wootton, Mike (2015) ‘Strong macroeconomic fundamentals’? August 11, 2015 8:25

• http://www.manilatimes.net/strong-macroeconomic-fundamentals/208676/