Reforms to buoy PH growth in the long term

MANILA, Philippines – Critical reforms in government, if put in place, will address development issues that still haunt the country, despite trumpeting that the Philippines is one of Asia’s fastest growing economies, analysts said.

The Philippines posted a 6.9% increase in its gross domestic product (GDP) in the fourth quarter of 2014, higher than the previous quarter’s 5.3%.

The growth was driven largely by communications, construction, manufacturing, real estate, transportation, among others, according to the National Economic and Development Authority (NEDA).

Non-inclusive growth

INFOGRAPHIC: Philippine GDP grows by 6.9% in Q4 2014, 6.1% in full year 2014. Details here: http://t.co/pIfUgI6Lnm pic.twitter.com/G0uwBNANwI

— NEDA Central Office  (@NEDAhq) January 29, 2015

Experts are wary of non-inclusive growth, but the Aquino administration has consistently said that it is striving for inclusive growth.

High growth in business process outsourcing (BPO), telecommunications, and real estate do not have strong linkages in the economy, because these are concentrated in Regions III (Central Luzon), IV (Southern Tagalog), and the National Capital Region (NCR).

These region have “no strong linkages in the economy,” said former Socio-economic Planning Secretary Cielito Habito.

Habito also saw trouble in exports – albeit growing by 15.5% in real terms in the fourth quarter and a full-year expansion of 12.1%.

“The highest product that we export is electronics, but what do we (also) import? Electronics.”

To broaden the base, Habito suggested that government buttress small and medium enterprises (SMEs) so they could penetrate the export market.

This could be done hand-in-hand with implementing policies that ensure fair competition among small and big players in the industries.

Spend to grow

The World Bank expects the country to rebound this year with a full-year estimated growth of 6.5%.

The forecast has been tamed in relation to weak government spending, which analysts described as an opportunity lost.

Since 1999, the average growth rate of government spending has been only 3.7%, Hongkong and Shanghai Banking Corporation Limited’s (HSBC) Global Research said in its economic data reactions report on January 29.

Others criticized government underspending when it could have infused more funds in the typhoon-affected areas. 

“The government failed to perk up the economy in the area where it could have done the most,” former Budget chief Bejamin Diokno said in a text message.

Hours after he briefed journalists on the country’s latest economic performance, Socio-economic Planning Secretary Arsenio M. Balisacan said in a lecture that private sector dynamism bore the weight of the growth.

But the country’s chief economist would want to see growth in tourism and manufacturing industries as these provide high quality jobs.

“If these industries don’t move first, then we will miss opportunities,” said Balisacan.

The country has made progress in pulling down employment and poverty incidence over the years, but think thanks say there remains a lot more to be done.

Reforms needed

WB’s senior economist in the Philippines Karl Kendrik Chua said reforms in governance are needed to enhance competition, increase investment, protect poverty rights, and simplify job creation.

In his talk on Thursday, Chua reiterated the need for the Philippines to pass its Freedom of Information bill “which is important to knock in good governance.”

Other priority bills that are meant to support economyic growth include the proposed fiscal incentives rationalization, the amendments to the Build Operate Transfer Law, and the Foreign Investments Negative List.

In a statement, Finance Secretary Cesar Purisima said these bills “are expected to further fuel growth over the medium term.”

Peace situation

This year’s performance, however, still rely on the country’s overall peace situation, which the private sector had wished for in the dawn of 2015.

A violent clash between the  government and the Moro Islamic Liberation Front (MILF) occurred anew in less than a year after both parties signed  a peace agreement, which would pave the way to create an autonomous region initially headed by the rebel group.

“It’s a missed opportunity if we don’t resolve or if we fail to resolve this problem at the soonest time,” said Balisacan.

“Whether you live in Mindanao or Luzon, it affects us directly. The impact of conflict has been quite substantial,” Balisacan added.

The country’s Global Peace Index (GPI) stood at the lowest quartile due to a combination of internal and external challenges, including its dispute with China over the West Philippine Sea.

The country recorded the 9^th highest level of terrorist activity worldwide in 2013, according to a study by London-based Institute for Economics and Peace (IEP).

The Global Terrorism Index recorded a total of 499 incidents in the Philippines that killed 292 and injured 444 in 2013.

Better performing 2015

A brighter performance is forecast for 2015, with the country preparing for another national election in May 2016.

“There’s something about elections that perks up the GDP,” Habito said.

Historically, GDP growth is higher during election years as against an average of 4.5% growth in non-election years since 2002.

The economy grew at 6.2% in 2004, 7.2% in 2007,  7.3% in 2010, and 7.2% in 2013, according to Habito.

Barclays analysts Rahul Bajoria and Bill Diviney, meanwhile, predicted expansion will be “robust” this year as the Philippines is expected to benefit from a marked drop in world oil prices while the central bank is expected to hold off on any interest rate hikes until the fourth quarter.

This would trickle down to better corporate earnings, according to COL Financial research head April Tan.

Buoyed by the fourth quarter rebound, on Thursday, the Philippine Stock Exchange Index rose to a high of 7,736.97, up by 3.38 points or 0.04%.

HSBC, however, is cautious of the economy’s growth trend.

In its analysis, HSBC said the drivers – construction investment and export of goods – are volatile components.

A dampened external demand, as well as a “high base effect” will decelerate exports’ growth in the coming quarters, it said.

“What’s really anchoring growth is the rather sticky household consumption, the least volatile component of GDP as well as the largest (69% in 2014),” the bank said.

Although the government appears confident that fiscal spending will pick up significantly to boost growth, the Bangko Sentral ng Pilipinas (BSP) will likely be vigilant, HSBC noted.

Liquidity conditions will likely stay flush for all of 2015, as the central bank tries to promote private sector investment and spending to offset lackluster fiscal expenditure, HSBC added.

HSBC also forecast rates to remain steady for all of 2015.

Long way ahead

Overall, analysts praised the Philippines’ economic performance, but the issues still hounding Asia’s erstwhile sick man could not be solved short-term.

“This remains consistent with our long-held view that the economy is on a solid growth trajectory,” Nomura research analyst Euben Paracuelles said.

Purisima, meanwhile, said in a statement that the country “has more fundamental strength than most peers to fuel long-term growth prospects and buttress against vulnerabilities to external shocks.”

But as long as reforms are there, Chua said, the government’s ambition – one of them include eradicating poverty – is not far from possible. 

“The Philippines has what it takes to eradicate poverty if it accelerates its reforms and make growth inclusive,” Chua said. – with reports from Agence France-Presse / Rappler.com