Philippine economy

[ANALYSIS] Wake up: The PH economy is turning sour, lagging behind

JC Punongbayan

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[ANALYSIS] Wake up: The PH economy is turning sour, lagging behind
We’re now lagging behind our ASEAN neighbors, notably Vietnam – the average Vietnamese is now richer than the average Filipino and their learning poverty rate is less than 2%, a stark contrast to our 90%

Last week, I dove into the latest GDP (gross domestic product) report of the Philippine government, and showed that the economy seems to be grinding to a halt.

A quick recap: GDP growth clocked in at just 4.3% in the second quarter of this year (April-June). The last time we saw growth near 4% was almost 12 years ago (barring the pandemic crisis).

The economy also produced fewer goods in the second quarter compared to the first. That was the first quarterly contraction of GDP since 2009 (again, barring the pandemic).

The situation is so bad that some forecasters are beginning to mention the dreaded R word: recession.

According to Miguel Chanco of Pantheon Macroeconomics, an economic research consultancy, we might see a “shallow technical recession” by the third quarter of 2023, “following the abysmal Q2 numbers.” (A technical recession means GDP contracted in at least two consecutive quarters.)

Although shallow, a recession in normal times is unheard of in recent Philippine economic history. If it happens indeed, it will be one for the books.

Why this rut?

Rate hike woes

One thing blamed for anemic growth is the successive interest rate hikes of the Bangko Sentral ng Pilipinas (BSP).

You see, as interest rates across the economy increase, borrowing becomes costlier. As a result, people put off spending on new houses, new cars, new businesses, etc. This dampens overall demand, leading to tempered prices.

But are the BSP’s monetary policies dampening demand a tad too much?

This may be partly why on August 17, for the fourth consecutive time, the BSP decided to keep its policy rate steady at 6.25% (Figure 1). No more rate hikes for now for two reasons. First, inflation (the beast they’re trying to control) is on the downtrend already. Second, production is slowing down, partly as a result of their own actions.

Figure 1.

In its press statement, the BSP said, “Authorities noted that the strength of economic activity going forward is likely to moderate as pent-up demand wanes and the full impact of prior monetary policy tightening continues to manifest.”

In other words, so-called “revenge spending” (think of the flurry of hotel and restaurant bookings after COVID restrictions were lifted) is waning already. Interest rate hikes may also be biting too hard on certain sectors.

This presents a dilemma, though, if the US Federal Reserve continues to increase its own rate hike in coming months (in its July 25-26 meeting, it raised its policy interest rate to a 22-year high).

A widening gap between the Fed and BSP’s rates might mean an outflow of dollars that will almost surely weaken the peso in coming months (as of August 17, it’s already at P56.77 a dollar). Will the BSP step in to draw the line and make sure it doesn’t exceed, say, P60 a dollar?

Inflation woes

At the same time that production and spending are both weakening, inflation might be inching up still.

Latest data show that inflation is fast returning to the government’s target range of 2-4%. The BSP expected in May that average inflation would settle at 5.5% this year, and 2.8% in 2024.

But now, in August, they revised their forecasts upward: inflation in 2023 is now expected to be at 5.6% (a 0.1 percentage point increase) and inflation in 2024 at 3.3% (a 0.5 percentage point increase).

This revision is mainly due to higher world oil prices.  But they also cited other factors: “the impact of possible higher transport charges; higher minimum wage adjustments; persistent supply constraints on key food items; and the effects of El Niño weather conditions on food prices and power rates.”

In short, don’t expect that price increases will slow down so much in the coming months.

In fact, we’re already seeing upticks in the price of staples like rice, owing to, say, India’s recent export ban on non-basmati white rice.

Average rice prices in the Philippines are already inching up as we speak (Figure 2). And in some places, rice is now at P56 a kilo. The truth is, we’re getting farther and farther away from President Ferdinand Marcos Jr.’s (far-fetched) campaign promise of P20 a kilo of rice.

Figure 2.

Spending woes

Another reason for below par performance of the economy this year is the extraordinarily slow spending of government. In fact, government spending contracted from the early part of 2023, as revealed in the latest GDP report.

Even the economic managers can’t fully hide their frustration. Budget Secretary Amenah Pangandaman said the situation is “nakakaiyak” (lamentable).

Long-standing bottlenecks in spending haven’t been addressed. In recent budget deliberations, the Marcos technocrats revealed that the average obligation rate of agencies was at just 30.5%. That means that out of agencies’ total budgets, they were able to commit only less than a third for spending on various projects and programs.

Some agencies’ obligation rates are much, much lower: a measly 5.6% for the Department of Information and Communications Technology, 10% for the Department of Migrant Workers, and 10.5% for the Department of Energy.

Unless these bottlenecks are addressed head on, government spending will continue to disappoint (and drag down overall growth) in coming months and years.

Debt woes

Finally, anemic growth doesn’t bode well for our ability to pay off our debts.

Finance Secretary Benjamin Diokno has repeatedly said that it’s okay for the Philippines to borrow, so long as economic growth “outpaces our debt.”

But that’s no longer true. Debt is now outpacing our growth.

From March to June 2023, our total debt grew by 2.1% (from P13.86 trillion to P14.15 trillion). By contrast, our total income (or output) shrank by 0.91%.

This is a recipe for disaster. If this keeps up, we will be truly, deeply buried in debt.

(A digression: In a recent Senate budget briefing, Senator Ronald “Bato” dela Rosa opined that maybe it’s best to just have more babies so that the debt per capita figure – now at around P123,000 – goes down. By the same token, should we also reduce the population just so GDP per capita goes up?)

The increasingly worrisome debt situation is the reason you hear the Marcos technocrats almost desperately pushing for new taxes.

On August 17, Secretary Diokno implored Congress to pass new tax measures that will allow government to earn an extra P120.5 billion in 2024. These measures include new taxes on digital services, single-use plastics, sweetened beverages and junk food, road usage, and even carbon emissions.

But before asking for new taxes, President Marcos himself must serve as an example by paying the estimated P203.8 billion estate taxes his family still owes the Philippine government.

Other leakages must be addressed as well, such as the P2.2-billion taxes unpaid by a Philippine offshore gaming operations (POGO) firm that already fled the country.

Another way to cope is to make sure that government spends its money wisely.

But is this the case with increasingly many agencies now asking for opaque and unaudited confidential funds?

What about the 1,095% increase of travel expenses by Malacañang in 2022 (more than 8 times the increase of tourism spending in the entire country for the same period)?

Another source of trouble is the unsustainable pension system of military and uniformed personnel (MUP). I already tackled this in a previous piece. (READ: “Did you know you’re paying for police, military pensions?”)

Woeful economy

Is weaker growth here to stay? I think so, especially since there are other important structural problems that remain woefully unaddressed, including the large-scale education crisis. (Did you know we have a whopping 90% learning poverty rate?)

We haven’t even talked about how much we’re now lagging behind our ASEAN neighbors, notably Vietnam. Did you know that the average Vietnamese is now richer than the average Filipino? And by the way, their learning poverty rate is less than 2% – a stark contrast to our 90%.

Vietnam is also emerging as a manufacturing powerhouse, exporting a lot of electric vehicles, computers, smartphones, and the like. Meanwhile, the Philippines is stuck with assembling semiconductors, other electronic products, as well as low value-added exports like furniture, coconut, and pineapples.

How and when will the Philippines get out of this rut? And what does Marcos plan to do about this? Does he even see the problem? –

JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. JC’s views are independent of his affiliations. Follow him on Twitter (@jcpunongbayan) and Usapang Econ Podcast.

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JC Punongbayan

Jan Carlo “JC” Punongbayan, PhD is an assistant professor at the University of the Philippines School of Economics (UPSE). His professional experience includes the Securities and Exchange Commission, the World Bank Office in Manila, the Far Eastern University Public Policy Center, and the National Economic and Development Authority. JC writes a weekly economics column for He is also co-founder of and co-host of Usapang Econ Podcast.