Signs And Wonders


What is the likelihood that the Government would succeed in delivering what it pledged to Congress when the 2023 Philippine budget of P5.268 trillion was proposed last year? The Government’s agenda for prosperity, the 2023 budget was submitted with the call: “Let the economic transformation towards inclusive and sustainable growth begin.”

Of course, the goals were rather ambitious. In times past we used to call these aspirational but we could not really afford to grow less because the Filipino people’s poverty and misery even worsened during the health pandemic.

Economic growth was targeted at 6.5-8% between 2023-2028, fiscal deficit to gross domestic product (GDP) ratio of 3% by 2028; less than 60% of government debt to GDP ratio by 2025; and 9% or single-digit poverty by 2028. The Government also embraced the previous administration’s goal of attaining upper middle-income status. Only the Philippines among the original ASEAN 5 remains in the lower middle-income category.

So far, the signs are not good enough even for the adjusted 6-7% growth for this year and the fiscal targets.

No less than the Bangko Sentral ng Pilipinas (BSP) in its latest Monetary Policy Report issued a few days ago projects that “economic headwinds, along with the impact of the cumulative monetary policy adjustments, could result in GDP growth settling below the DBCC’s target of 6-7% for 2023, and 6.5-8% for 2024 and 2025.”

Thus, we believe the Development Budget Coordination Committee (DBCC) is most likely to revise the targets further down.

The first half could only yield a real GDP growth of 5.4% following the disappointing 2nd quarter performance of only 4.3%, representing a quarter-on-quarter actual decline of nearly 1%. UK-based Pantheon Macroeconomics described it as an “utter disaster.” If the 3rd quarter mimics the previous quarter in terms of quarter-on-quarter drop, Pantheon estimates that we might be seeing a “modest technical recession.”

True, some observers have argued that the Philippines has the most dynamic and resilient growth based on its decent 5.4% growth despite the high base in 2022. Many of the comparable economies were weaker last year and higher growth could have been easily attained.

We have a different reading of this trend.

The United Arab Emirates (UAE) and China were cited as prime examples of what may be described as less resilient. But the quarterly trend may be actually showing that the UAE and China are gaining momentum: the UAE from a negative 4.4% in the 1st quarter 2022 to 8.5% in the 2nd quarter 2023, and China from 0.4% in the 2nd quarter 2022 to 6.3% in the 2nd quarter 2023.

In the case of the Philippines, we seem to be losing steam. Growth rates in the 1st and 2nd quarters 2022 and 2023 trace a decelerating path: 8%, 7.5%, 6.4%, and 4.3%, respectively even as our deep, successive declines in 2020 through the 1st quarter 2021 were reversed during the 4th quarter 2022. But such a trend brings us away from the economy’s pre-pandemic growth trajectory.

The challenges are just awesome. Given the first half real GDP growth of 5.4%, we need to grow by 6.7% for the last two quarters of this year just to catch up with the low end of the official target of 6-7%. To jump back to the pre-pandemic groove, current estimates require us to grow by more than 9% until 2028.

As the Australians would say, this may not likely eventuate.

For there is a good probability that the slowdown of the 2nd quarter might spill over to the 3rd quarter. The reason is weak public spending. What is sad is that we should have better control over it, but we failed to spend as programmed. This was explained to the Philippine Senate last week. The problem is that it’s not unique in the last quarter; this has been a recurring trend over the last few years. Both the finance and budget departments have also issued circulars to mandate higher spending to government agencies.

So, what will motivate higher spending in the next quarter?

Secretary Amenah Pangandaman explained that “the primary reason for (underspending) is that government agencies are still in the process of implementing and procuring resources for their programs and projects in the first six months of the year.” But we thought these government agencies have been told time and again about their low absorptive capacity and that their share of the budget has been adjusted for this weakness to spend? Early procurement has been one of those initiatives in the past to boost government to spend more. Whatever happened to the other mitigation measures such as frontloading and faster fund releases, updating government rules on procurement and various capacity building initiatives?

We recall that in 2018, the Philippine Government actually overspent by over 1% over the program, reversing 12 straight years of underspending. Then Budget Secretary Ben Diokno went as far as declaring that “underspending is a thing of the past.”

To be sure, underspending in an emerging country like the Philippines is almost a crime. Our people are in serious need of infrastructure and social services for unemployment and poverty remain rampant. Underspending will not help in closing the large infrastructure gap following the long years of neglect on our roads, bridges, mass transport systems, and infrastructure.

But there’s another perspective to underspending. Dr. Toby Monsod of the UP School of Economics wrote in December 2016 that underspending in the last five years “has less to do with apathetic or incompetent bureaucrats and more to do with inertia and indigestion in the face of ambitious targets.” That is, after a long period of restrained spending, high growth targets are assigned higher levels of spending. Inertia and indigestion set in.

But will this explain the broad issue raised by former Senate Minority Leader Frank Drilon about the unused funds in both the Philippine International Trading Corp. (PITC) and the Procurement Service of the Department of Budget and Management (PS-DBM) “that remained dormant for years” and are kept with these agencies? During the pandemic, the DBM itself reported that more than P100 billion of the P717 billion appropriated for the pandemic response was left unspent.

In the annual Commission on Audit (CoA) audit reports, this observation is not limited to the PITC or PS-DBM.

For Monsod, the challenge is how to deal with the coordination problems and other structural bottlenecks related to budget design and execution process. It would also be useful if devolution is further strengthened with greater fund control by local governments.

We expect the economic slowdown to continue through next year as funds are allocated in a bigger way to travel, confidential and intelligence funds, as well as to a new expense item called the Maharlika Investment Fund (MIF). In fact, with the remittance of the seed fund from the Land Bank and the Development Bank of the Philippines, as well as from the dividends of the BSP, the government will have to start sourcing funds outside the budget.

In fact, as former BSP Governor Philip Medalla remarked at the UP School of Economics, the country will likely take on additional borrowing as there is “no wealth to manage.” The diversion of funds from the budget that is partly financed by debt means the MIF is debt-financed.

On top of this potentially huge drain from the budget, the allocations of some key items stand to be cut back. One is education through a lower budget of the University of the Philippines and 30 out of 117 state universities and colleges. Two is health through the reduction in the budget for the prevention and control of non-communicable diseases, the four major specialty hospitals, and the Medical Assistance for Indigents Fund even as the cancer fund was allocated P1 billion.

While the government is talking about investing for the future, the broadsheets also reported on its on-going talks with many countries as potential loan sources for future projects. Among them are Sweden, France, England, and Italy in an attempt to “diversify” the country’s funding sources. If this should happen, we would be investing in fixed income, equities, projects, even in joint ventures through the MIF on the one hand, and borrowing money for our infra and social services, on the other hand. Why, at the least, this is bad fiscal management.

We are all waiting for economic transformation to begin.


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.