Numbers Don’t Lie

(Second of two parts)
In overall competitiveness, the Philippines is only better than Cambodia, Laos, and Myanmar today. We have been overtaken by Vietnam and Indonesia in most competitive indicators in the last two years. This is not to say that the Philippines did not improve. We did, especially between the years 2010 to 2015. In the last two years, however, the rest of the region accelerated their reforms while the Philippines remained static given the disruption of the national elections and the period of adjustment of the new administration.
Having said that, let us now compare the state of the economy today versus how it was three years ago, before President Duterte took over.
Looking through the data, my immediate assessment is that the economy remains fundamentally strong, albeit showing cracks that could bite us in the back, if left unaddressed.
Gross Domestic Product (GDP), per se, has been growing vigorously. It expanded by 6.9% in 2016, 6.7% in 2017, and 6.8% in the first quarter of 2018. It is worth noting that this is the first time since our post-liberation era that the Philippines has grown beyond 6.5% for ten consecutive quarters.
On the demand side, the drivers of the economy have been government consumption, capital formation, and consumer spending. The latter, however, has slowed down this year due to the rising prices of commodities.
On the supply side, the service sector expanded by 6.8% in 2017 and further to 7% in the first quarter of 2018. Industry grew by 7.3% in 2017 against 7.9% in 2018. These numbers are relevant as it shows the extent by which our industrial sector continues to grow faster than the service sector. It proves that the country’s manufacturing base is expanding and that industrialization is well on track.
Growth in agriculture remains dismal at 2.4% in 2017 and 1.5% in the first quarter of 2018.
Overall, GDP growth in 2017 was higher than the a 5.8% recorded in 2015. The average economic growth during the Aquino administration was 6.3%.
As a result of rapid economic expansion, per capita income has increased correspondingly. On a price adjusted viewpoint, it stood at $6,875 in 2015 and improved to $8,229 in 2017. In other words, the average income of the Filipino increased by 20% over two years.
Unemployment and underemployment rates have also improved. From 5.7% and 16.1% in 2015, respectively, to 6.3% and 18.5%, in 2017.
The improvement in the country’s unemployment position was a result of a corresponding rise in foreign direct investments and the jobs they created. From $6.64 billion in 2015, FDIs peaked to an all time high of $10.05 billion in 2017.
Investment in infrastructure is the centerpiece of the Duterte administration. The ratio of infrastructure spending to GDP improved from 4.3% in 2015 to 5.3% in 2017. Note, this is the first time in 50 years that the ratio breached the 5% level. If the intentions of the Duterte administration are to be fulfilled, spending on infrastructure will accelerate to over seven percent from 2019 to 2022.
The otherwise rosy picture of the economy is negated by rising inflation. Last month, inflation peaked at 5.2%, bringing the first semester average to 4.3%. Inflation was negligible in 2015 at only 1.41%.
Last month was the fourth successive month in which inflation exceeded the BSP’s comfort zone of 2-4%. Spiking inflation is a result of the TRAIN Law and the higher taxes on fuel, automobiles and other commodities like sugary and alcoholic beverages, tobacco etc. This resulted in successive price increases in transport and logistics, electricity, food and beverages, clothing, housing, education and health care.
To deal with higher prices, households inevitably tap into their savings. This results in a drop in savings rates and available funds that would otherwise be used for investments, making the economy less productive.
High inflation also induces monetary authorities to increase interest rates, if only to temper it. This, in turn, makes credit more expensive for both manufacturers and service providers. The high cost of money will inevitably be passed on to the consumer through higher prices. Mortgage and consumer loans will also become more expensive, making it more difficult for people to purchase homes, cars, and appliances.
High interest rates mop up liquidity in the market. This dampens consumer spending and drags GDP.
For exporters, the high cost of money, logistics, and power make it more difficult for them to compete in the global marketplace. In fact, the steep decline of Philippine exports has already begun.
High inflation causes fluctuations in exchange rates. The continuous drop of the peso is testament to this. The volatility of the peso affects exports, imports, and business transaction across borders. It also breeds business uncertainty. Potential investors will think twice before investing in our shores given our unstable prices and erratic currency
High inflation has multiple toxic effects that can blunts the benefits of our 6%+ GDP growth.
Our rising debt is a cause for worry.
Public debt has increased from $115.6 billion in 2015, to $129.16 billion as of end-2017. Last week, government announced its plan to borrow a whopping $22.4 billion (P1.189 trillion) to finance its spending plan for 2019. This is on top of the $16.75 billion (P888.23 billion) it will borrow this year.
Public debt to GDP ratio was around 41% in 2015 and is likely to increase by at least three percentage points due to government’s increased borrowings. This is manageable should our balance of trade and current account be healthy. Problem is that both are deteriorating.
As of the end of 2017, the trade gap (exports minus imports) posted a deficit of $28.786 billion, the largest in our history. For the first five months of the year, the deficit was already at $15.77 billion. All indications show that Philippines is headed for a record breaking deficit of $30 billion this year.
Imports are growing in strides due to our need mineral fuel, as well as iron and steel used for government’s infrastructure program. We have also been importing massive amounts of equipment and machineries. All these are productive assets, which is a good thing.
However, our exports have not been growing at a pace that could help offset our mounting import bill. It has in fact decreased by 5%, year on year. Merchandise exports amounted to only $26.914 billion from January to May, a slide from $28.33 billion for the same period in last year. Government’s goal of increasing exports by nine percent is no longer attainable as our manufactures become less competitive.
The deficit is also widening in our current account (the balance of accounts that takes into consideration trade in goods, trade in services, investment incomes, and transfer payments). From a surplus of $601 million in 2015, we swung into deficit territory in 2017, clocking in -$2.52 billion. It is seen to worsen to $3.1 billion this year. OFW remittances, income from the IT-BPO and tourism as well as foreign direct investments are no longer enough to cover our forex expenditures.
Thus, we can expect the peso to weaken further.
There is nothing wrong with amassing debt, so long as you can pay for it. Problem is, our Gross International Reserves (GIR) have been deteriorating too. GIR is the amount of foreign currency deposits, bonds, gold and special drawing rights held by a country.
From a high of $86.12 billion in September 2016, it fell to $80.669 billion in end-2017 and plummeted further to just $77.68 billion last May. The recent decline is steep.
The Philippines is far from a debt crisis, but our rising debt levels coupled by our eroding current account and foreign reserves is a cause for worry.
The time of President Ramos saw the rise of the electronics industry. President Arroyo’s era is credited for the development of the IT-BPO industry. The Aquino administration ushered-in the resurgence of the manufacturing sector and public private partnerships. It is still unclear what industries the Duterte administration is championing.
Mind you, infrastructure development is not an industry — infrastructure is merely an enabler of industries.
The need to develop new industries is now more urgent than ever since our main foreign exchange earners are in jeopardy. In IT-BPO, artificial intelligence will soon replace voice-based business process outsourcing. More than a million call certain agents, and the revenues they generate, stand to be obliterated sooner than we think.
In electronics, there is now a generation of integrated circuits and semiconductors. Unless we attract the manufacturers of these technologies or provide incentives to our existing manufacturers to upgrade their facilities, the $32 billion annual revenues earned from this industry is bound to decline.
Simply put, we need to develop new export winners. Experts suggested that the Philippines can be competitive in agro-industrial products, shipbuilding, household appliances, and chemicals, among others. Whatever it is, the Department of Trade and Industry must work double time to develop these industries. We need new foreign exchange earners and we need them now, if only to remain economically solid.
This assessment of the economy should give us the right perspective as the President delivers his State of the Nation Address this week.
Andrew J. Masigan is an economist