Steadying the Ship

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The Philippines has posted surprisingly low first quarter GDP growth of just 0.4%, far below previous government projections of 2.5%, creating significant cause for concern. However, too much alarm will only serve to amplify the already stinging effects of the US-led global economic turmoil. The country still controls the reigns over its economy primarily due to the fact that its underlying fundamentals, especially within its financial sector, have provided a cushion against external recessionary pressure.



This latest revelation detailing the weakened state of the Filipino economy has left many within government wondering just what exactly went wrong. Government's initial response to the crisis, in the form of a P330bn ($6.9bn) stimulus package, appears to have been largely unsuccessful in the opening quarter of the year – the question remains as to why.



Indeed, even the Bangko Sentral ng Pilipinas (BSP) appears to be perplexed by the current state of affairs in the economy. Strong lending from the banking sector, albeit slightly slower than in years past, has indicated what was thought to be higher levels of economic activity. Monetary demand has also been relatively high posting double-digit growth in April, prompting the increased lending and liquidity in the market.



The general consensus is that the continuing effects of recessionary economies worldwide are simply too immense to be solved through monetary policy alone, no matter how sound or strong BSP policies are. Despite a perceived diminished influence in monetary policy given the scale of the crisis, we are still likely to see further rate cuts throughout the year from the BSP.



BSP Governor Armando Tetangco Jr recently told local press, "We're in a good position because we have remaining ammunition, unlike in other countries where rates are already very low and they have little room to move down further. This gives us more flexibility."



The BSP has already cut its key lending rate by 1.75% since last December, which now stands at 4.25%. Inflation is also on its way down, and Governor Tetangco expects inflation to fall as low as 1% in September on the back of decreasing prices of commodities and an improving exchange rate.



As the BSP continues to cut interest rates in an attempt to further stimulate lending and control monetary policy, others continue searching for an explanation of the economy's poor first-quarter performance.



In a statement to local press, the socioeconomic planning secretary, Ralph G Recto, stated, "We need to look into the cash position of the national government to indeed verify whether the disbursements from the Budget Department were actually received and spent by local governments and other line agencies. In short, we need to ensure at this point that the additional budgetary allocation was actually spent."



Also now placed in a difficult position is the secretary of finance, Gary Teves, who has long advocated tight control of the national budget and repeatedly asserted the need to keep the budget deficit cap under P199.4bn ($4.2bn) or 2.5% of GDP. Considering the fact that these figures were already a significant increase from the original deficit cap of P102bn ($2.1bn), or 1.2% of GDP, upon release of the first-quarter data Teves now faces a difficult balancing act, with the deficit only likely to widen as the year continues due to lower than expected tax revenues.



The National Economic Development Authority is already looking forward to next year, claiming that should the economy continue to slide, an additional stimulus package in 2010 would be necessary – further widening the deficit to roughly P240bn ($5bn), or 3% of GDP.



Meanwhile, the Joint Foreign Chambers of Commerce (JFC) has submitted its recommendations for economic reform – which it said could mean as much as $9bn in foreign direct investment (FDI). The Filipino economy is fairly isolated, a fact exemplified by its notably low FDI, registered at $1.5bn in 2008. Some analysts have argued that the self-reliance of the country when it comes to investment has been an important factor in shielding it from the economic calamity abroad. Nevertheless, increasing FDI should be made a priority by the government if it is to achieve its ambitions of high-end growth.



In total the JFC recommends 10 legislative reforms, including: an Investment and Incentives Code, a Real Estate Investment Trust, amendments to the Customs Brokers' Act, a Department of Information and Communications Technology (ICT) , a Preneed Code, a Reproductive Health Act, a Residential Free Patent, Freedom of Access to Information and the Revised Kyoto Convention (forthcoming this December). The JFC also went a step further in identifying the country's most promising sectors for development: agro-industrial, business-process outsourcing, creative industries, infrastructure and logistics, manufacturing, mining and tourism.



While achieving all of the JFC's recommended reforms in the near future is more of a dream than a possibility, the disparity between the Philippines' potential to attract FDI and its actual FDI is something that has been observed for years. The government has already addressed some of the reforms, such as the possibility of a new Department of ICT as early as next year, while others are likely to stay locked in debate for the foreseeable future.



Given the current conditions, moving forward the government will likely continue to revise down its growth predictions for 2009 from its original target of 3.1-4.1%. It's also noteworthy to mention the possibility of negative real GDP per capita this year, often used as a benchmark for standard of living, as there is a growing likelihood that the country's high population growth rate of nearly 2% could very well outpace GDP growth.



Although Filipino economic growth may be at its lowest in a decade there is certainly no need for panic given the circumstances. There are several factors that should bode well for the country as the year progresses. Firstly, delayed effects from first-quarter stimulus spending are likely to be felt as the year goes on; which combined with election preparation and spending for next spring's presidential elections should strengthen further stimulus spending. Additionally, the strong fundamentals underpinning the nation's financial sector have given the BSP a strong position with considerable influence – even if monetary policy alone will not be enough BSP strategy should provide substantial stability. Finally, for the Filipino economy to grow this year strong performances will be required from key areas, such as business process outsourcing and overseas foreign workers remittances, to help keep the economy afloat until the storm passes.

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