Can Philippine economy sail through global storm?

Katherine Visconti
The World Bank Manila Office advised the Philippines and other countries in East Asia to prepare for the worst in the face of strong headwinds from the global environment

MANILA, Philippines – The Philippines and other countries in East Asia and the Pacific are “facing strong headwinds from the global environment,” thus, World Bank country economist Karl Kendrick Chua’s advice is to “prepare for the worst.”

On Thursday, February 23 at a joint forum between the World Bank (WB) and the Philippine Institute for Development Studies (PIDS), Chua painted a gloomy global picture saying, “We cannot rule out a recession or a much longer recession because of the conditions in Europe and concerns over whether the U.S. can maintain it’s fiscal position.”

He said the consequences for developing countries would be vulnerability in exports, remittances and industrial production. 

“In the Philippines we see a slowdown in growth of remittances first because of much lower demand in developing countries, second because deployment has gone down,” Chua explained.

World Bank preliminary data from January, 2012, which Chua warned was still subject to changes, showed remittances would only grow 5% compared to highs of 13.7% in 2008 and 8.2% in 2010. 

PIDS President Josef T. Yap said, “Remittances are a sort of safety valve for our society, they make up about 30% of GDP.” He said private sector would need to start investing more to make up for less growth in remittances.  

Yap also pointed to the rising price of food and oil as a factor to look out for and a reason for what he called ‘the disappointing growth’ in 2011.

He pointed out that while global food prices had begun to drop at the beginning of last year, Philippine food prices had continued to rise.

Crucial for internal growth

Despite the negative global outlook, PIDS and World Bank economists see strong opportunities for internal growth in 2012 but cautioned that a rise in GDP would be contingent on increased government spending.

Chua stood behind the World Bank’s latest 2012 estimate of 4.2% annual growth but explained the figure was based on the government spending only 85% of the planned budget for the year.

He said preliminary estimates from January show GDP would reach 5.5% if 100% of the budget was spent or languish at 3% if only 75% of the planned budget used.

Actual spending as % of planned

Government spending growth

Contribution to GDP growth (ppt)

GDP growth
75 -3.6 -0.4 3.0
80 4.4 0.5 3.9
85 7.7 0.9 4.2
90 9.6 1.1 4.5
95 11.5 1.3 4.7
100 19.0 2.2 5.5

(WB staff preliminary estimates from January 2012 that are subject to change)

Meanwhile, PIDS’s Yap had a sunny forecast that GDP could reach 5.6% with on-track spending.

He credited underspending as one of the factors slowing growth between 2010 and 2011. He cited a study from PIDS Senior Research Fellow Rosario G. Manasan showing that the government’s underspending last year amounted to P165 billion, translating to nearly 1.5 to 2% of GDP. 

Yap thought  government got the message to spend more and estimated that public spending would contribute 1.5 to 2% to GDP.

Watch out for fake indicators 

Despite the positive news, both economists warned that seemingly good signs, like the record highs in the stock market and rise in value of the peso might, should be taken with caution.  

Chua said, “Recently we have seen higher stock market index but this phenomenon is considered still quite volatile, sudden shifts in investor perspective could change the picture quite suddenly.” 

Yap actually saw the strengthening of the peso as a bad sign.

“The appreciation of the peso is not necessarily a good thing. It affects exporters and it affects remittances. The more pronounced effect is that it makes imports cheaper and affects the domestic manufacturing sector more than exporters because their competition can sell at a lower price,” he said.

Yap believed one of the underlying causes of the rise in the peso and portfolio investments was the increase in the country’s foreign reserves.

He cited World Bank data showing that foreign reserves nearly doubled from $37.55 billion to $75 billion in 2011.

“That’s too much of a good thing. It reflects that we’re not spending enough,” he said.

 

CAUTIOUSLY OPTIMISTIC. World Bank Country Director and Philippine Institute for Development Studies President Dr. Josef T. Yap at a joint forum on Thursday, February 23, 2012.

Add fuel to the fire 

World Bank Country Director Motoo Konishi was of the opinion that a greater sense of urgency is needed.

“One thing that’s noticeable is the feeling of urgency to implement is not there…. When you go to China, Indonesia and Vietnam you feel an absolute sense of urgency by the government,” said Konishi. 

“The opportunities are great,” he said, “if you do the right things in the next 3 to 5 years the country could grow 7 to 8%.” – Rappler.com

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