Can the Philippines move twice as fast?

Former finance secretary and Makati Business Club co-vice chairman Roberto F. de Ocampo delivered this speech during the Arangkada Philippines forum on “Moving Twice as Fast” last January 26, 2012 at the Marriot Hotel in Pasay City.

Many of us, myself included, were fired up with a lot of optimism when we started 2011. Carried over to the year was the euphoria of the 2010 elections, reinforced with the battlecries of the administration’s “Matuwid na Daan,” the anti-“wang-wang” pronouncement and tis rallying mantra: “Kung walang corrupt, walang mahirap.”

With it came a sustained image of an upbeat Philippines ready once more to link potential to reality and proceed beyond resilience to determination and to show its true worth inspire of the pervading uncertainties and challenges in the local and economic arenas.

2011 economic performance

The government’s full-year growth forecast for 2011 was from 4.5% to 5.5%, with an aspirational target of 7% to 8% under its so-called “inclusive growth” outlined in the Philippine Development Plan (PDP) 2011-2016.

The economy, however, failed to live up to expectations, to put it delicately, drawing a falling straight-line graph and finally posting a dismal 3.2% for the 3rd quarter–discerningly lower than the government’s revised 2011 target of at least 4.5% and which some more creative pundits alluded to as an unfortunate presentation of one form of “Matuwid na Daan.”

Even with a P72 billion fiscal stimulus program launched last October to perk things up, there are no indications that it made much of a dent on last quarter growth numbers.

In comparison to our Asean neighbors, relatively higher growth rates were posted during the same period by Indonesia at 6.5%, 6.1% for Vietnam and Singapore, 5.8% for Malaysia, and 3.5% for Thailand, who similarly had to contend with severe floods since the end of the 3rd quarter.

We still do not have the official growth figures for yearend 2011 as it is due to be published I think still towards the end of January. But the poor growth rates posted during first 3 quarters put us in the category of the weakest performers in the region.

On the bright side–if you can really call it that–it would be very hard to duplicate the dismal growth rates of 2011. So at this point there is really no where to go but up. The administration will have to work very hard to do worse, and from all indications, it doesn’t intend to.

‘Misdirections’ in 2011

How did we get ourselves in this situation? Though government identified external influences like the faltering economy in the United States and Japan, and the prolonged debt crisis in the eurozone and destructive typhoons that caused losses and damage in the local agriculture sector as significant contributory factors to the country’s poor economic performance, there were a good number of financial institutions, economists, and even administration allies who openly pointed to the government’s massive underspending, especially in infrastructure, as a primary culprit for our poor performance last year.

The government acknowledged this situation itself since it was clear that actual government expenditure for the first 11 months of 2011, net of interest payments, amounted to P1.35 trillion or P365 billion short of the programmed P1.711 trillion expenditure for the year.

Government started with the private sector as the main engine of growth so the Public-Private partnership or the PPP was the central vehicle the administration was banking on to push the economy.

Introduced as the administration’s flagship infrastructure initiative, the PPP got off to a rather tenuous start and seemed to continue on a sputtering mode even before it was able to take off, with only one completed bid last year despite the original plan to roll out 5 or 6 big-ticket infrastructure projects within 2011 to spur economic activity and create more jobs.

This, together with the anemic government spending, are the main things that impinged on the government’s capability to push the economy more vigorously considering the high ratings of the president’s popularity.

But whether the Aquino administration was either overcautious or simply beyond its element to execute its projects as some critic propounded, we continue to view the situation with optimism. Obviously if the president is popular, he is doing something right and what we need to do is to help him capitalize on this and have a firmer connect between his popularity and moving the economy, so that the whole ship of state moves forward with speed.

The last thing we need is a Hobson’s choice, as it were, of a continuing economic history of having unpopular presidents with reasonable economic performance and popular presidents with anemic ones.

Gov’t plans to do better

It is reassuring to hear the president himself recently declaring there would not be a repeat of last year’s underspending, and officials consequently announcing the planned bidding of 16 major projects under the PPP. Together with agriculture, the president expects infrastructure development and tourism to be the lead growth drivers in 2012, which he hopes “will insulate us from whatever happens overseas.”

We are similarly glad to note that some major pillars of the economy remain strong– some indicators being that remittances remain high, foreign reserves are at an all-time high, and inflation has been kept at bay and has been contained in a band which is both acceptable and manageable.

Still it is quite obvious at this point that the Philippines needs further reforms to address structural bottlenecks in the economy. This would include measures to raise revenue to support higher spending on infrastructure, health, education and social protection as well as simplifying business regulations to encourage investment, entrepreneurship and job creation.

Arangkada Philippines has provided many key recommendations on these points and we would like to mention our agreement with these, particularly on the sectors mentioned.

2012 growth forecasts

The question is, in relation to your theme of “Moving Twice as Fast,” will we move twice as fast this year?

Though dark clouds continue to loom in the global economic horizon and will affect the country and our neighbors, there is nevertheless some optimism with regards to the Philippine economy.

Since the eurozone is already in recession and with China, Japan and the USA all facing a challenging growth outlook, demand for Philippine exports is expected to fall and the Philippines will need to lean on domestic spending to manage decent growth in 2012.

Specifically, exports are expected to drop by 9% in the 1st quarter and 7% in the 2nd quarter before inching up by 2% in the 3rd quarter and 7% in the 4th quarter. Exports might contract by 6.5% this year from a forecast 6.6% decline last year.

And with local businesses and consumers shackled by the global downturn, the economy’s expansion will largely depend on government outlays, making the General Appropriations Act of 2012, signed into law last December 15, pretty much the central economic growth formula for the year. AGain, this is assuming the GAA’s P1.8 Trillion peso budget would be spent as programmed as has been assured by Budget Secretary Butch Abad. In the 2012 budget, almost P440 billion would go to infrastructure, agriculture, tourism and economy boosting projects.

Among the big-ticket items in the national budget are the following:

• P395 billion for the cash transfer Pantawid Pamilyang Pilipino program
• P22.1 billion as strategic support for Public-Private partnerships
• P2.9 billion for major ICT governance projects
• P24.8 billion for the construction and rehabilitation of irrigation systems
• P1.8 billion for the Payapa at Masaganang Pamayanan (Pamana) program, which aims to build peaceful communities in conflict-affected barangays
• P12.3 billion for flood-control projects.

Presumably, the national budget will be instrumental in attaining the following strategic goals laid out in the PDP 2011-2016:

1. Economic growth of 7% to 8% for at least 6 years
2. Growth that generates mass employment (at least a million per year)
3. Growth that reduces poverty, including the achievement of Millennium Development Goalst (MDGs)

Adding to our positive outlook is the Citibank report which cites the Philippines as a fertile ground for cross-border merger and acquisition (M&A) deals. Prospective investors are particularly attracted to our growing population and continued strength of consumers as a driver of the economy, coupled with the country’s resilient consumer market, which continued to be supported by overseas remittances and business outsourcing revenues.

Reforms and recommendations

Assuming that all goes smoothly according to plans, if we take the lowest actual growth rate of 3.2% of 2011 and multiply it by 2, this would give us a 6.4% minimum growth for 2012 in order to reflect an economy that has moved twice as fast.

Given the most optimistic of circumstances, we need to ask ourselves: Is this a realistic growth rate we can achieve this year? Moreover, is moving twice as fast, fast enough given the circumstances surrounding our local economy?

My answer to both is in the negative. The government’s growth rate projection for 2012 is 5% to 6% but the 2012 projections of a cross section of multilateral and private financial institutions showing a consensus of lower rates. The conclusion then, it would seem, is that we can move twice as fast–but not this year. This should be the year for firmly laying the foundations for moving the economy twice as fast in the coming years with a combination of continuing reasonable levels of popularity of the president, taking to heart lessons from the previous year, taking corrective measures in key areas, and focusing on the task of building on the strengths of the Philippines.

I have high hopes for the president’s popularity to continue, given the fresh air introduced by determined measures of anti-corruption, even as I also hope that the government will not be unduly distracted from its economic task by inevitably continuing political battles.

Infrastructure

As to lessons learned, certainly the move to much higher spending levels is itself an admission of the need to drastically shift gears. The continuing central problems to address are: infrastructure, infrastructure and infrastructure.

A more vigorous approach to this via whatever combinations of PPP and ODA the government could muster plus the government’s own stepped up spending would be needed. Bear in mind that the gestation period for significant infrastructure projects is a minimum of 2.5 years between identification and start of construction. There is clearly no time to waste.

This level of spending will however need financial resources which brings us to fiscal strategy. While I laud the Department of Finance’s commitment to tax compliance rather than new taxes to raise funds, it would I believe still eventually need a balanced approach between effective tax administration and measures to expand the tax base to really pull it off. It may sooner rather than later also need new tax measures and incentives rationalization.

But can it be done? Definitely yes–not this year, but I’m positive that this is possible in the coming years given the proper environment.

Mining

Beyond the key reform areas that we have mentioned, the starting point for any county to move purposely forward is to have a clear vision on what its niche in the regional and global economy.

Singapore set out to do this early on and they defined themselves as an international port and that’s what they set themselves out to be. China defined itself as the export-oriented, technology-centered economy.

What is ours? You look at that and you look at our resources. Mining certainly is one. It is a key growth area, but why can’t it move? One reason is that many local government units strongly oppose mining. We must persuade these LGUs to resort to a multi-sectoral dialogue in their jurisdiction, to reconsider their ban on the industry and make their stand more congruent to the national policy on mining. They could change their minds once they realize the great potential for the generation of jobs and revenues for their communities.

It would also do well for the government to shorten the processing time for issuance of the Environmental Compliance Certificate (ECC). There is also a need to streamline and shorten the permit system relating to the mining industry.

Agriculture

For ages since I was a young boy, the constant refrain was the Philippines is primarily agricultural and so on, but we went from there to romanticize subsistent agriculture. We still love to look at paintings of nipa huts and carabaos and rice fields, but pastoral scenes do not make for agro industry.

Similarly, we pride ourselves with land reform structures that do not emphasize productivity but that of mere land ownership.

We need to do more, a lot more for our country’s agriculture. More irrigation facitilities, post-harvest facilities, farm to market roads, bridges and other infrastructure. The government must release more funds for extension, research, agricultural education and training. The cost of farm inputs must also be made more affordable to our farmers and we must pass the Land as Collateral Act.

If implemented, these could help us achieve self-sufficiency in our domestic food requirements as well as for export.

Tourism

Choosing our niche applies to the tourism industry as well. Why is Singapore positioning itself as the entertainment of Southeast Asia when all their entertainers are coming from here? Or why are they positioning themselves as the medical center of the region when all the doctors and nurses are coming from here? If we have defined ourselves as that kind of center then what keeps us from doing it?

In its recent World Economic Outlook, the International Monetary Fund said that economic prospects for the Philippines and its Asian neighbors have dimmed due to a slight recession in the eurozone. This, together with developments elsewhere, could somehow dampen prospects for our country’s economic growth. However, I am confident in our strong macro-economic fundamentals. Our strong dollar reserves, domestic consumption led by a large and growing population of young people and our growing call center industry.

Buoyed by a large workforce of English-speaking and highly literate young Filipinos, low-cost and reliable international telecommunications, inexpensive site locations and a strong government support for this sector, the BPO industry has been growing consistently. But there is a need to strengthen our government’s fight against piracy and cyber crime by passing stronger laws that penalize these illegal acts.

We should also make the move to go beyond being sophisticated telephone operators to becoming producers of software, games, graphic arts.

Popular president

As mentioned earlier, one factor working in our favor is the president’s high ratings. He is popular and his serious crusade for transparency and anti-corruption will not go unnoticed by the outside world. This will send strong signals to investors that we are now working hard to achieve a better investment climate in the country. The Philippines is now cleaning house and telling the world that we are now ready for business.

As I come to the end of my presentation, I would like to underscore my position that I don’t think we can pull a twice improved growth performance this year, but equally, let me also stress that though an ambitious goal, it is not out of reach.

Having learned our lessons from 2011 and with the government’s renewed focus on moving the economy, the time to do this is now. – Rappler.com