Philippine Economic Briefing: Let the good times roll?
Some faces were old, some were new, but the message seemed to be positively contagious that good times will continue to roll. For that was where the Philippine Economic Briefing (PEB) last Monday, May 27, was coming from, that the Philippines is already on the go, we just have to fast track economic progress. This is another way of saying challenges remain, there is a whole lot of space for our economic managers to do more. We should maximize our growth potential and keep the good times rolling.
Banko Sentral ng Pilipinas (BSP) Governor Eli Remolona, Jr., in his taped welcome remarks, delivered the opening salvo by delivering one extremely important piece of news, that the BSP is beginning to tame inflation after facing “unusual” and large supply shocks in the last two years. He cited the decline of inflation from a peak of 8.7% in January 2023 to April 2024’s 3.8% “which is within our target range.” Inflation, without question, has been so stubborn that for years it has consistently topped Pulse Asia’s “most urgent” national concern, even higher than fighting graft and corruption in government and enforcing the law. Inflation is an elephant, and it is a gut issue.
Remolona’s news was also true for the first four months of the year. Inflation averaged 3.4% with a risk-adjusted forecast of 3.8% for 2024 and 3.7% for 2025. Non-monetary measures are critical here, especially in agriculture and logistics. The BSP should also remain engaged in sufficiently restrictive monetary policy until actual and projected inflation rates are firmly within the target, and avoid telegraphing an early easing. We want to see Pulse Asia’s surveys showing a reordering of concerns away from high inflation. Finally, it was no less than the International Monetary Fund (IMF) Resident Representative Ragnar Gudmundsson who, during the briefing, pointed out the need for close monitoring of the US Fed action on interest rates. An earlier easing by the BSP could result in a smaller interest rate differential and abet capital outflows, weaken the Philippine peso, and fire up inflation again.
Successful inflation management could very well help extend the good times.
High inflation last year slowed down private consumption, tempered public spending and shaved not a few percentage points off gross capital formation. We continued to lose external competitiveness. Despite the rise in the minimum wage rates from P512 in 2017 to P610 in 2023, higher inflation caused real wage rates to dip from P529.50 to P505.23.
Unlike in the past where each of the economic managers spoke in turn, only Finance Secretary Ralph Recto delivered the one single presentation with 33 slides. His comprehensive presentation was an excellent take-off point for the three panels that dwelt on, one, the macroeconomy; two, growth constraints and competitiveness; and, three, investment in the Philippines.
What was the key message of the finance secretary?
His concluding slide summed up everything, that “we have all the makings of a prosperous economy.”
Secretary Recto first argued that our economic outlook is the brightest it has ever been. His basis is the affirmation by multilateral organizations that the Philippines’ economic growth could be the frontrunner in the Association of Southeast Asian Nations (ASEAN), topped by the ASEAN+3 Macroeconomic Research Office projecting 6.3% growth for 2024 and 6.5% for 2025. The IMF and the Asian Development Bank (ADB) are not too far behind. But the World Bank expects the Philippines to show less than 6% growth for both years, or less than the target of at least 6% for 2024 and 6.5% for 2025.
The World Bank’s less optimistic expectation reflects the BSP’s latest Monetary Policy Report, issued after the May meeting of the Monetary Board. The report says that while the gross domestic product (GDP) growth outlook remains intact over the medium term despite the relatively tight financial conditions, growth “could settle below the government’s target as higher global crude oil prices and positive interest rates temper domestic demand.” With an estimated negative output gap, the economy could be operating slightly below potential. The BSP is looking at possible deflationary pressure.
Citing S&P (2023) and IHS Markit (2022), the finance secretary also claimed that we are poised to become a trillion-dollar economy, “joining the ranks of economic giants like China, Japan, India, and South Korea.” Asia’s leading lights will be powering global growth in the next few decades. This may be conditional because the health pandemic, with all the prolonged lockdowns, set us back a few years. Unless we grow by much more than the downgraded growth targets through 2028, a trillion-dollar economy may remain aspirational.
This seems to be the gist of the recent pronouncement by the Regional Agenda, Asia-Pacific of the World Economic Forum that “we feel that the most exciting chapter of the country is yet to come.” It will come, but not yet because the opportunities are there and the interest is robust in the private sector, but it takes time for both opportunities and interest to translate into actual growth dividends.
Based on a 2022 Goldman Sachs forecast, the Philippines is expected to grow by an average of 3.9% between 2020-2075 against Asia’s 2.6% and the world’s 2.2%. This should be enough to catapult the Philippines to becoming the 14th largest economy behind the likes of China, India, and the United States, and even beating France. Nigeria, Pakistan, and Egypt would be among the biggest economies, but we didn’t quite see Malaysia, Singapore, and Thailand among the Top 15.
How do we engineer this?
Secretary Recto cited the excellent platform for growth provided collectively by good inflation prospects, strong consumer demand supported by a vibrant labor market, huge domestic capacity to allow local and foreign businesses to thrive, strong overseas remittances sustaining domestic consumer demand, as well as resilient tourism and business process outsourcing.
The Philippines has very little baggage in aspiring for a higher growth path. Its external debt-to-GDP ratio is one of the lowest and its foreign exchange reserves level is one of the highest in terms of adequacy. Very few would argue against the strength and stability of the Philippine banking system. Fiscal consolidation is in full swing even as public spending continues to build infrastructure and provide social services. Over time, Secretary Recto correctly argued that the Philippines should be able to outgrow its debt. Its access to the capital markets remains excellent, with tight credit spreads.
We have what it takes to keep the good times rolling.
If we invest well in education and social services, this will allow the Philippines to reap the so-called demographic dividends. This could provide upskilling intervention that, as correctly stressed by Riza Mantaring of the Private Sector Advisory Council to the President, can mitigate the serious skills deficiency. The Build Better More Program is making available 185 big-ticket infrastructure projects for physical connectivity and health, among others. To top it all, investment policy has never been more open and more liberalized, with no less than the President himself as the investment champion. Based on Finance’s monitoring, the President’s world engagements have yielded $72.2 billion worth of investment pledges as of end-2023.
Of course, it is one thing to solicit investment pledges, and another thing to get them to actually come and invest their money here. For these to materialize, Secretary Recto reported that the Philippines is now aggressively addressing various bottlenecks. Game-changing reforms are being put on stream to address the issues of red tape and ease of doing business.
We were delighted to see Mr. Recto’s last few slides because all these growth-enhancing strategies are supposed to “harness the talents of our young workforce and build a nation where every Filipino can thrive, secure decent jobs, and create better lives for themselves. We agree with the ultimate metrics, and this is to reduce poverty incidence to 9% by 2028, or sooner. With actual poverty incidence for the first semester of 2023 at 22.4%, that is a tall order, and perhaps incredibly difficult to deliver on, without a more fundamental change in governance and political order.
A good way to conclude this piece is to link a conducive macroeconomic landscape to availability of cheap and reliable supply of energy. San Miguel’s Ramon Ang was more than correct to comment during the Q&A portion of the first panel that we have a big reserve of crude oil, and, actually, natural gas too, in the disputed West Philippine Sea. We can very well explore and drill offshore only if we could have access to the disputed territories. Ang possessed the wisdom to declare that “we should protect our territory.”
Patriotism can, without question, help keep the good times rolling.
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.
