LOCAL government units (LGUs) have been instructed to develop a capital investment planning capability, the Department of Finance (DoF) said, citing the need to raise their creditworthiness and improve their access to financing.

“As we implement the full devolution of certain functions from the executive branch to local governments pursuant to Executive Order (EO) No. 138, government units are confronted with the challenge of funding the expanded scope of basic services and local development projects. It is therefore imperative that LGUs put in place plans on capital investment,” Finance Secretary Benjamin E. Diokno said in a statement on Thursday.

EO No. 138 outlines the devolution of National Government functions corresponding to the expansion of LGUs’ share of national taxes.

The expansion of the LGUs’ National Tax Allotment comes as local officials made only limited use of their authority to borrow.

According to the DoF, only 62% of LGUs have availed of credit in the past five years.

In 2021, LGU borrowing only amounted to P136.6 billion or around 0.74% of gross domestic product.

The Bureau of Local Government Finance (BLGF) reported that LGUs were only able to utilize 51.5% of their borrowing capacity in the past five years.

“These were most commonly used for the construction of local government buildings and roads, acquisition of lots, and procurement of heavy equipment,” it added.

The BLGF issues certificates of net debt service ceiling and borrowing capacity to LGUs to set the maximum amount that LGUs can borrow.

Mr. Diokno said the initiative is being pursued as part of an engagement with the World Bank Group, in which LGUs will be capacitated to undertake the planning of their capital investment programs.

“This initiative will steer our LGUs on the path to creditworthiness, which is key to accessing long-term financing required for sustainable investments,” he added.

Ateneo de Manila University Economics Professor Leonardo A. Lanzona said that LGUs are key players in the economy’ recovery.

“For this to happen, they should be allowed to create and develop their own economic programs and policies. The national agencies and departments should refrain from setting rules and policies for the LGUs to follow. In this case, matters relating to industrialization, agricultural development and the enhancement of the service sector, including infrastructure, should be decided at the regional level,” he said in an e-mail.

Mr. Lanzona said that LGUs should develop their own industrial policy along the lines of service expansion, which should be presented to the National Government in order to reduce barriers that can mobilize both labor and capital to competitive regions.

“It is likely that some regions may lag behind. While the National Government should keep their hands off from the economic programs of the regions, it is crucial that they provide the necessary public goods, such as health, education and infrastructure to the lagging regions. This should be the only rationale for government intervention,” he added. — Luisa Maria Jacinta C. Jocson

MOODY’S ANALYTICS said it lowered its 2022 growth estimate for the Philippines to 6.7% from 6.8% previously due to the lingering impact of the pandemic.

The downgrade comes despite a stronger-than-expected third quarter performance for Philippine gross domestic product (GDP).

The global research firm retained its forecast of 6.4% growth in 2023.

The economy expanded by 7.6% in the third quarter, exceeding the revised 7.5% growth posted in the second quarter and exceeding the 7% reported a year earlier.

In the nine-month period, GDP growth averaged 7.7%.

“The Philippines will feel the lagging effect of post-pandemic reopening as it had the longest continuous lockdowns of any country in the region,” Moody’s said in a report.

However, it noted that pent-up demand by companies and households for goods and services “will support growth next year, as well as government fiscal policy that is promoting education, public health, and a return to infrastructure development.”

Moody’s Analytics said that other primary risks include persistent inflation and potentially higher interest rates. “Current inflation exceeds 6% over the year in the Philippines,” it said.

Moody’s Analytics also raised its inflation forecast to 5.5% in 2022, 5.4% in 2023, and 3.1% in 2024, against its earlier estimates of 5.3%, 5% and 2.9%, respectively.

Headline inflation accelerated to 7.7% in October, mainly due to rising food prices.

October inflation was the highest since the 7.8% posted in December 2008, during the global financial crisis.

October also marked the seventh straight month that inflation breached the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target this year.

For the 10-month period, inflation averaged 5.4%, lower than the BSP’s 5.6% full-year forecast.

The BSP this month increased its benchmark rate by 75 basis points (bps) to 5% to tame inflation and keep in step with the Federal Reserve. Since May, the BSP has hiked rates by 300 bps.

The Fed has raised rates by 375 bps since March, including its fourth 75-bp rate hike earlier this month, bringing its benchmark interest rate to the 3.75-4% range.

China Banking Corp. Chief Economist Domini S. Velasquez said that GDP will likely hit at least 7% in 2022 due to the “resiliency of domestic demand against an elevated inflation and high interest rate environment.”

“Although the Philippines was quite late in removing pandemic restrictions, this led to robust pent-up demand with service activities reaping the benefit the most. This holiday season will also be the first with almost no restrictions which could further boost fourth quarter GDP,” she said in a Viber message.

Ms. Velasquez also said 2022 inflation will likely average 5.8% this year.

“We think inflation will still hit 7.7-7.8% levels in November and December, driving the full-year average higher,” she said.

“Vegetable prices are still on the rise, some shortages in onions and garlic have been observed, and sugar prices have not gone down despite reports of imports. Core inflation, or prices of goods deemed less volatile, is still on an uptrend until the first few months of 2023,” she added.

Foundation for Economic Freedom President Calixto V. Chikiamco said that the continued tightening by the BSP will dampen GDP growth.

“Interest rate-sensitive sectors like real estate, cars, and appliances will take a hit from higher interest rates,” he said in a Viber message.

Mr. Chikiamco noted that the Moody’s Analytics forecast adjustment was “statistically insignificant.”

“I don’t have a specific inflation forecast but inflation may decelerate by next year if recession hits the global economy and prices of commodities, particularly oil, fall,” he added. — Luisa Maria Jacinta C. Jocson

THE Philippines should manage the economy in a way that grows the middle class, to prevent members of that income category from falling back into poverty, participants at a conference discussing a World Bank report on inequality.

“If we manage to reduce poverty, we will have a large middle class that will become a stronger voice in politics and elections. The middle class is fragile and fall back into poverty with every shock or crisis they face, and that will shape the nature of politics,” IDinsight Southeast Asia Regional Director Ronald U. Mendoza told a panel discussion on Thursday, during which participants discussed the findings of a World Bank report, “Overcoming Poverty and Inequality in the Philippines: Past, Present, and Prospects for the Future.”

“And then on the political agency side, we need to give our emerging middle class and remaining poor a stronger voice in policy making, which will only happen if we reduce inequality,” he added.

Between 1985 and 2018, poverty fell by two-thirds, according to the World Bank report.

“However, income inequality did not begin to decline until 2012. It is still high: the top 1% of earners together capture 17% of national income, with only 14% being shared by the bottom 50%,” the report found.

Mr. Mendoza said reducing inequality should be a key policy focus.

“It’s no longer just economics. I think we need to open our eyes and focus on a bigger canvas, not just economic indicators, but most of the social, political, and other indicators of inequality that frustrate our efforts to build social cohesion and unite people around certain reforms,” he said.

Mr. Mendoza also noted the importance of private sector cooperation in generating more quality jobs and providing stability for the middle class.

“We (also) need to develop new markets for a recently-emancipated middle class that still faces many risks and can easily slide back to poverty if they don’t manage these risks well,” he said.

“We all agree that if you provide salaried jobs that tend to be more formal or attached to insurance mechanisms, you are more resilient to shocks and there is more stability,” he said.

Makati Business Club Director Francisco Alcuaz, Jr. said corporations should work together with micro, small and medium enterprises (MSMEs.)

“One of the keys is to help MSMEs generate more jobs. Larger businesses should make a greater effort to bring MSMEs into their supply chains so they can grow and generate more jobs,” he said.

Mr. Alcuaz said companies must also put in the effort to upskill workers.

“We need to do things at the employment level. One thing we are supportive of is adjusting rules for apprenticeship. There are safeguards that can be put in place to allow companies to bring in people, not at full minimum wage, just to get them into the system and teach them skills to become valuable workers,” he added. — Luisa Maria Jacinta C. Jocson