Signs And Wonders


Last year it seemed like everything was turbulent, with no less than the International Monetary Fund (IMF) observing that Russia’s invasion of Ukraine and global inflation, especially for food and energy, depressed growth and downgraded many fearless forecasts. If we should add, the pandemic surge in China definitely threatens the world’s economic prospects.

Five charts capture the Fund’s story of turbulence.

The World Uncertainty Index covering 143 countries surged, then moderated but has remained elevated. Its Reported Social Unrest Index, down during the pandemic, now shows people are back on the streets, although at below pre-pandemic levels. Surging food and energy prices pushed inflation to unprecedented levels in many countries and motivated central banks to undertake “increasingly synchronized monetary policy cycle around the world.” As a result, the Fund’s growth forecasts have declined. Finally, surveys indicate steady worsening of manufacturing and services activities in the bigger economies.

But in the Philippines, economic managers remain optimistic that “the worst is over and the best is yet to come.” It’s not difficult to be contrarian.

With 7.7% growth in the first three quarters of 2022, the official target of 6.5-7.5% looks achievable, thanks to a generalized growth pattern in agriculture, industry, and services. On the demand side, the lifting of mobility restrictions is expected to support the growth momentum in consumption, investment, public spending, and external trade. Some mileage is also expected from the parallel gains in job creation and business registrations in 2022. Although volume, value, and the composite stock index are stubbornly lower than pre-pandemic levels in 2019, stock market capitalization now stands higher.

For their optimistic stance, our economic managers also invoke the early approval and therefore the early disposition of the national budget, the medium-term fiscal consolidation, the swift approval of the Philippine Development Plan 2023-2028, the country’s favorable credit rating, the resilient banking system, and a host of other macroeconomic buffers.

Economic managers would also echo the singular message of President Bongbong Marcos before the May 2022 election: “As long as the country stays united and its political leaders and policy makers remain focused on economic growth, the Philippines’ future remains bright.”

This kind of messaging is not lost on the private sector. For instance, the Federation of Filipino Chinese Chambers of Commerce and Industry, Inc. expressed its optimism that domestic economic growth in 2023 could reach 6.5-7.5%, even higher than the official target of 6-7%. As expected, the Chamber is also hopeful that the President’s visit to China would bring in more goodwill and economic benefits to the Philippines.

Both First Metro Investment Corp. and the University of Asia and the Pacific Capital Markets Research argue that a sharp slowdown in Philippine economic growth in 2023 is unlikely because the country’s domestic demand is its main driver. This is no different from the expectation of some slowdown by the Rizal Commercial Banking Corp. to around 6-6.5% this year from 7.5-7.7% last year.

These expressions of optimism contrast heavily with emerging trends in the global economy. For instance, IMF Managing Director Kristalina Georgieva the other day was quite categorical that 2023 is going to be “tougher than the year we leave behind.” The three big economies namely, the US, EU, and China are showing signs of economic deceleration at the same time.

China’s dire situation is especially relevant to the Philippines. An important trading partner to us, China is expected to drag global and regional growth chiefly because of the pandemic factor. That would mean a possible resumption of mobility restrictions and a downgrade of its growth prospects. Although the US appears resilient, about a third of the world’s economies might contract.

That in itself could further force the Bangko Sentral ng Pilipinas (BSP) to sustain its tight monetary policy. Resilient US economic growth implies strong labor market dynamics and domestic demand which could force the US Fed to continue squeezing credit and liquidity to suppress price pressures. Already, the US economy just created additional 200,000 jobs with the jobless rate whittling down to only 3.7%, one of the lowest since the 1960s. Thus, for the BSP, this is a red flag which might require an appropriate response. Otherwise, capital outflows might ensue with the peso weakening anew.

Domestic growth factors are not completely hospitable to a possible economic outcome comparable to 2022 which benefitted much from revenge consumption, investment, tourism, and public spending. We may not see them again this year.

Renewed health protocols prove that the Omicron subvariant BF.7, the same variant plaguing China today, is now very much around us. Our Health department should be able to advise the community very soon whether this could trigger a generalized response and make lockdowns unavoidable. Without a good digital and centralized testing and tracing capability, a granular approach may not be feasible. The economy could suffer the ultimate collateral damage.

Inflation pressures have not abated. Last year’s actual inflation averaged 5.8%, with yesterday’s announcement of December inflation of 8.1%. This year, while inflation could slow down somewhat, it would remain elevated above the official target of 2-4% at 4.3%. High inflation eats into consumption, discourages production, and increases the need for public spending.

With sustained tight monetary policy expected from the US Fed, this means there is little incentive for the BSP to shift away from current policy settings. In fact, the BSP announced last year its intention to bring down inflation near 3% by the third quarter of 2023, rather than later. Before inflation finally normalizes to the target range, one could expect some hits on the real sector through tighter liquidity and higher cost of credit.

Real sector effect is most obvious based on the latest BSP surveys of both business and consumer expectations.

Business and consumer sentiments are not exactly signaling sustained economic growth of the same momentum observed in 2022. Business confidence actually weakened in the fourth quarter. With very close correlation with the national income account, the confidence indices for the next quarter and the next 12 months are not exactly encouraging because they both indicate less optimistic outturn. It’s the metrics on financial conditions, access to credit, and average capacity that are the lowest.

Likewise, Filipino consumers facing high and rising commodity prices were more pessimistic in the fourth quarter and less optimistic for the next quarter and the next 12 months. Consumer respondents were unanimous in saying that their negative feelings about buying especially big-ticket items were due to protracted high inflation, high borrowing rates, and weak peso for the fourth quarter, next quarter, and the next 12 months. These are bad news for consumption expenditure which accounts for nearly 70% of our gross domestic product.

Leading indicators of business activities, other than these sentiment surveys and inflation, are trending in the same direction. Car sales, industrial energy sales, stock market price-earning ratio and index growth remain tepid.

Finally, the issue of thinning fiscal space could be a game changer in our quest for sustainable and inclusive economic growth. We cannot underestimate those inclusions in the national budget for 2023 with very little public-goods value including intelligence funds and congressional pork barrel. Debt servicing requirements are accumulating this year and beyond due primarily to the mishandling of the pandemic crisis.

Between 2019 and November 2022, the National Government piled up nearly P6 trillion in public debt because public revenues remained steady at just about P3 trillion annually while public spending rose from P3.8 trillion before the pandemic to P4.5 trillion in 2022. During this time that public spending should remain focused on mitigating supply shocks and supporting infra and social services, the last thing we should be doing is ignoring appropriate fiscal consolidation. This is hardly possible when Congress, instead of focusing on such imperatives, is contemplating the so-called Maharlika Investment Fund which we cannot afford. We have no surplus funds to spare. We have a large fiscal deficit to finance.

Lest we forget, last year, Nouriel Roubini warned the world that we face an unexpected, unusual, unprecedented uncertainty in 2023 and beyond. One threat, a downside risk in fact, is the mountain of debt various countries have accumulated especially during the pandemic. We might be in the same boat as most of hard-pressed Europe unless we set aside non-urgent legislative agenda and focus really hard on what produces, rather than what dissipates, economic growth.

We have no time to lose.


Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.