The Philippines: Boosting domestic demand

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January’s revelation that the Philippines’ economy grew 3.7% in 2011 came as the government and central bank announced new measures to further boost growth. Indeed, President Benigno Aquino’s administration plans to spend its way through current economic challenges, refocusing on domestic − rather than foreign − markets.

While the government forecasts GDP growth in the region of 5-6% in 2012, some analysts believe this rate is overly optimistic: at the end of January, international bank Barclays said it saw the country’s GDP growing by 4.2% in 2012.

Exports fell by 6.9% in 2011, largely due to the ongoing sovereign debt crisis in Europe and the slow economic recovery in the US – two of the Philippines’ major trading partners. As a result, the government is now looking to massively increase public spending on infrastructure projects such as roads, ports and airports in order to keep the economy from stagnating.

On January 2, budget secretary Butch Abad said the government was ready to begin infrastructure projects worth $3.2bn, an amount equivalent to 78% of the 2012 budget for public works spending.

In all, the government plans to spend a record $42bn this year to bolster growth to as much as 8% annually, offering up to 16 projects to investors in 2012, compared with the one contract it awarded last year.

On January 4, the central bank, Bangko Sentral ng Pilipinas (BSP), sold 2037, 25-year, dollar-denominated bonds worth $1.5bn in New York to help bankroll the country’s growth plans. The bonds are expected to yield 5%. In all, the government plans to raise more than $2bn from overseas bond sales in 2012.

This will no doubt be helped by credit ratings agency Standard & Poor’s raising the outlook on the country’s “BB” debt rating to positive in December 2011. Many observers, including senior BSP officials, see this move as a signal of a possible upgrade from the current second-highest junk grade, perhaps within six to 12 months. In addition, Fitch Ratings and Moody’s have recently upgraded the Philippines’ sovereign rating.

Some loosening of monetary policy is also in the works. On January 19, BSP announced it was cutting its overnight lending rate by a quarter of a percentage point from 4.5% to 4.25%, the first time the central bank has cut rates since 2009.

“The Philippine economy is likely to face external headwinds in 2012,” said Amando Tetangco, the governor of BSP, in a statement after the rate cut announcement. “The benign inflation outlook allowed some scope for a reduction in policy rates to help boost economic activity and support market confidence.”

Inflation hit an 11-month low in December 2011, while consumer prices rose 4.2% from a year earlier, Tetangco said. BSP’s deputy governor, Diwa Guinigundo, told reporters in Manila that the central bank is forecasting an inflation rate of 3.1% for 2012 and 3.4% for 2013, with the inflation outlook favourable and the probability of upside price risks minimal.

There may be more rate cuts to come, as well. Some analysts anticipate another reduction − to 4% − when the central bank next meets in March. “The inflation environment gives the central bank flexibility to take more insurance for growth,” said Prakriti Sofat, the vice-president and regional economist for Barclays Capital. “We expect one more rate cut in the second quarter.”

The Philippines is hardly alone in trying out a myriad of solutions to maintain growth during a slowdown. The IMF is projecting worldwide growth of 4% this year, a reduction from earlier estimates of 4.5%, while the World Bank is predicting global growth of only 2.5% in 2012. Indeed, the entire South-east Asian region has watched with concern as its formerly robust growth has begun to slow. Recently, the central banks of Indonesia and Thailand have also tinkered with their monetary policies in an effort to fend off the external economic malaise.

In addition to floating bonds, the Philippines’ government is also actively looking to attract public-private partnerships (PPPs) to fund infrastructure projects. According to the socioeconomic planning secretary, Cayetano Paderanga Jr, the government is allowing foreign firms to participate in components of projects, or to partner with domestic companies. An agency dedicated to this, the PPP Centre, is liaising with local governmental bodies and potential foreign investors.

The success of this relationship in attracting greater foreign investment will undoubtedly be crucial in determining the speed and delivery of the government’s project portfolio and thus of its plans to boost growth in a time of global export chills.

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