The State of the Nation, at its best and worst.

On July 22, President Rodrigo R. Duterte will deliver his state of the nation address (SONA) before a joint session of congress and before the Filipino people. Last week, however, the economic cluster of the President’s cabinet gave a comprehensive report on the state of the economy in a pre-SONA conference. In attendance were the diplomatic corps, members of the business community, and select members of media.

I attended that conference and was happy to note that the economic cluster echoed many of my thoughts about the economy. Without pre-empting myself, lets just say that the economy is the brightest aspect of the Duterte narrative. Sure, there are cracks, not the least of which is the weak manufacturing sector, but overall, its fundamentals are strong enough to achieve our medium term economic goals. The economy is the nation’s strength.

Its greatest weakness, on the other hand, is its foreign policy. I reckon both sides of the proverbial coin should be taken into consideration when assessing the true state of the nation.

The manner by which the President bends over backwards to the wishes and abuses of China is something that has become a cause for worry. I can appreciate the pursuit of an independent foreign policy — a policy that removes us from the talons of the US. But the reality is that the President has in fact pivoted away from the US and towards China. What we have today is not an independent policy but a pro-China policy.

The pivot is so extreme that government is in effect abetting China’s illegal occupation of Philippine territory in the West Philippine Sea. I say “abetting” because government has not questioned China’s defiance of the UNCLOS (United Nations Convention on the Law of the Sea) court which ruled that China’s nine-dash line is invalid and its occupation of territories within the Philippine’s exclusive economic zone is unlawful. The absence of protests from the Philippine’s side has kept our neighbor to the north in good standing with the UN even if they defied the very ITLOS (International Tribunal for the Law of the Sea) treaty of which they are signatories.

The President has relaxed immigration laws for Chinese workers even if it takes away jobs from Filipinos and even if the privilege is not reciprocal. More recently, it has found reasons to justify, if not defend, the ramming and abandonment of a Filipino fishing boat at Recto (Reed) Bank by a bigger Chinese vessel.

Loyalist say that playing the US against China is the President’s way of getting the best deals from both. From where I sit, only China is reaping any benefits here.

As the President goes, so does his cabinet. This is a understandable. What is worrisome is that even Senate President Tito Sotto apes the President’s words and attitude towards China (once a plagiarist, always a plagiarist). It is troubling because the Senate should be acting as the check and balance to the executive branch. Sotto’s actions only emboldens China even more. I can only imagine how Chinese officials snicker and sneer about their sway over Philippine policy makers.

All these beg the question — is the deference towards China due to economic reasons? Records show that despite all the promises of Chinese investments, our intake from them was a measly $28.8 million in 2017 and $198.7 in 2018. China’s investments in the Philippines are dismal.

Is it for soft loans to fund the country’s infrastructure program? While China talks big about easy availment of official development assistance (ODA), even National Economic and Development Authority Secretary Ernesto Pernia admits that Chinese ODA is among the most difficult to obtain. In addition, Chinese ODA is not the only game in town as Japan offers better terms.

One can’t help but wonder — is the President playing on China’s team or is he just deathly afraid of being wiped out by China’s military and nuclear might? I believe it is the latter. I agree with Randy David’s theory when he said: “In President Duterte’s world, if a rule or an agreement cannot be backed-up by force or coercive power, it would be useless to even call attention to the need for it. Better to keep quiet and leave things as they are. Or, in expectation of concessions, privileges or protection, you could bow to a superior power who would take you as a friend or as a loyal subordinate.”

This is a travesty because there are others ways to fight this war. Among them is by invoking the rule of law and insisting that China pay the consequence for breaking international treaties. By using diplomatic persuasion or controlling global opinion over China’s abusive tactics. We are no longer in the 18^th century where military might is the end-all-be-all in resolving conflicts among nations.

To have our Chief Executive and head of the Senate act as lawyers for China puts to question government’s readiness to defend the country’s sovereignty when the situation escalates. And make no mistake, China, with its expansionist policy and bullying tactics, will take more and more from us. Will government give in without a fight? Paralysis by fear is what makes our foreign policy frail.

THE ECONOMY
The economy is our greatest strength. What is most encouraging about the last 12 months is that we have seen the fruits of the robust economy trickle down to the grassroots. Unemployment decreased to 5.2%, the lowest in 50 years. Incidence of poverty also decreased to an all time low of 21% from 27.6% just three years ago. This occurred despite a rise in population by 1.5%. Per capita income increased to $3,303 from $3,162, allowing us to graduate to an upper middle income economy this year, three years ahead of schedule. Even more encouraging is the fact that all 17 regions posted high growth last year, with 14 of them growing faster than Metro Manila. The regions of Bicol, Davao, and Mimaropa posted the highest RGDP growth rates. All these suggest that finally, economic growth is becoming inclusive.

From a macro point of view, while the growth of the economy decelerated to 5.2% in the first quarter of the year due to the budget impasse, Finance Secretary Carlos Dominguez III has put in motion a plan of accelerated spending so that we can still achieve 6% growth. Regardless, the economy grew by an average of 6.5% in the last 11 quarters.

What we have is an economy running on all cylinders except the one fired by agriculture. The agricultural sector is the lone drag to our otherwise hardy economic story. It has failed to expand at pace with the rate of population growth. As I always say, there is a limit to how often one can use the El Niño phenomenon as an excuse. No surprise, the agriculture secretary’s resignation was readily accepted. The job is too big for him.

Foreign direct investments topped $10 billion for two years in a row, the highest intake ever achieved. Structural reforms promises a higher intake in the years to come, says Mr. Dominguez. These reforms include the Ease in Doing Business Law, the second trench of tax reforms (which will lower corporate tax from 32% to 20%) and the relaxation of some industries included in the negative list for foreigners.

Standard & Poors upgraded the Philippine’s credit rating to BBB+ Stable, a notch below the much coveted “A” rating. The Philippines now rates higher then some OECD countries like Italy and Portugal. The government has recently launched a program to elevate the Philippines to an A rating. Being classified as such indicates that we have succeeded in putting all the reforms in place and that the conditions are right to realize sustained high growth over the next decade.

Finally, the Electricity Power Industry Reform Act (EPIRA) has been declared a failure by the senate for its inability to bring down the cost of power. EPIRA is the reason why our manufacturing industries have not flourished. Amendments to this flawed law are underway. Also, expansion of the Anti-Money Laundering Act (AMLA) is being deliberated upon to guard against illegal funds flowing in through casinos. The second trench of the tax reform package (called TRABAHO) is expected to sail through both houses given the success of TRAIN whose revenue haul was 108% of target.

Speaking of taxes, collections from the Bureau of Internal Revenue and the Bureau of Customs amounted to 14.7% of GDP, the highest collection ratio ever achieved. Moreover, dividends from government-owned and -controlled corporations (GOCC) amounted to P40 billion last year, another record. In the first half of 2019, GOCC dividends are already at P45 billion

External debt (the amount owed to foreign creditors) increased from 23.3% of GDP in 2018 to 23.9% in 2019 while total national debt (debt from local and foreign creditors) also increased from 42.6% of GDP to 44%. This is understandable given the massive importation of steel and cement to support the infrastructure program. Debt is still manageable at this level. Gross international reserves are at $83.88 billion, sufficient to finance seven months of imports.

Government spent 5% of GDP on infrastructure last year, double the average rate over the last 50 years. Spending will accelerate to 7% as we approach 2022.

All these suggest that the economy is at the pink of health and that momentum for sustained growth is on our favor.

This is the state of the nation, at its best and worst.

Andrew J. Masigan is an economist.