Reality starting to creep in?


The Aquino government has been riding high on the 6.6 percent GDP growth rate last year and the granting of investment grade to the Philippines recently. It has been gloating, declaring that its efforts at good governance are paying off. And much like the Ramos administration, which achieved an average growth rate of 5 percent annually, and the Macapagal-Arroyo administration, which got a high 7 percent (by Philippine standards) in 2007, the administration of Benigno Aquino III has been boldly projecting that the country could achieve the status of developed economy in the future.

However, much as I do not want to sound like a party pooper, recent data and reports show that a lot has been more of a hype rather than a reality. Here are some of the statistics mentioned by

-Foreign direct investments registered a net inflow of $576 million in January, down by nearly half from $1.05 billion posted in January last year.
-Merchandise exports fell 15.6 percent in February
-Revenues from exports declined to $3.74 billion in February from $4.43 billion a year ago. Thus, for the first two months of 2013, exports earnings went down to $7.75 or by 9.4 percent from $8.55 billion in 2012.

Businessmen, according to the editorial, are blaming the peso appreciation for the decline. But there is more to it than just the peso appreciation or more accurately, dollar depreciation.

In the first place, an export-oriented, import-dependent economy like the Philippines is bound to bear the brunt of the world economic crisis. How could there be more demand for exports of raw materials and low value added semi-manufactures such as electronic chips when there is a glut in capital goods, consumer durables, and other consumer products? Even China, the destination of choice of multinational companies, has been experiencing a slow down. To add to the burden of local production, advanced capitalist countries have been pushing their exports to backward economies such as the Philippines in an effort to mitigate the impact of the crisis on their own countries. In fact, this is what the Asia pivot of the US is all about: to corner the huge Asian market, which comprises more than half of the world’s population.

Second, Ibon Foundation clearly pointed out that the 2012 GDP growth has mainly been fueled by construction and infrastructure projects, as well as construction-related services. Even the country’s gross capital formation or investments in capital goods – which is an indicator that businesses are expanding – in 2012 is mainly underpinned by investments in construction, and in mining and construction-related machineries. It could not be attributed to an expansion of production nor of long-term investments in the country.

Third, the much-hyped investment grade is neither a reflection of a strong, robust economy nor of a favorable investment climate, being brought about by strong domestic demand. It just means the country has been dutifully paying its debts and the chances of default on loans are slim.

This is why the growth in foreign investments are not in the direct, production-related type but in portfolio investments or hot money, which finds its way to stocks, real estate, derivatives, futures, bonds, money market, loans and the like. Investments in production are not profitable because of the economic crisis and yet, those dealing in speculative investments are assured that they would not have problems cashing in on their investments and pulling out their money anytime. The net inflow of foreign portfolio investments reached $1.09 billion in the first quarter of 2013, more than double the $464.45 million registered in the same period last year.

The IMF still maintains its projection that the Philippine economy would grow by 6 percent this year and would slow down to 5.5 percent in 2014. But this still positive outlook is based on the projection that domestic demand would be strong. And this projection of a strong domestic demand is not based on a reading that the employment situation is good and incomes are increasing across the board. It is based on strong remittance inflows – OFWs are expected to continue propping up the economy – and low costs of credit or low interest rates. OFW remittances serve two purposes for the economy: it contributes to the country’s dollar reserves and it fuels domestic demand because the families and relatives of OFWs are provided with disposable income to buy consumer goods.

The low costs of credit and low interest rates, on the other hand, could be attributed to the granting of an investment grade – as creditors are wont to loan more because of the low risk of default – and the Bangko Sentral ng Pilipinas, which is keeping interest rates low. The projection that this would fuel domestic demand is quite a long shot. It is based on the assumption that since interest rates are low, people would be encouraged to borrow money for private consumption and investments.

During the early years of the 21st century, domestic demand in the US was fueled by credit through credit cards and mortgages. But this could not be the case in the Philippines as a very small minority of the population is able to get credit cards. Look at how credit card companies are so aggressive in peddling their cards in malls but are quite conservative in approving applications. Those who have already been using credit cards are more likely to be approved by other credit card companies rather than those who have none. Filipinos are also not wont to mortgage their house, if they have any, to finance their private consumption. Middle class Filipinos are more likely to sell their cars and other belongings to be able to pay the amortizations for the house.

Securing loans for investments? Fat chance that this would increase. Banks in the Philippines are likewise very strict in approving loans. One would have to go through the eye of the needle. Besides, the business environment for small and medium businesses is not that good because of the high unemployment among and depressed incomes of majority of Filipinos.

Last April 15, the came out with a report WB warns against economic ‘overheating’. It quoted an excerpt from a World Bank report, which read, “Continued demand-boosting measures may now be counterproductive. Countercyclical demand policies have helped sustain growth, but they may now risk stoking inflationary pressures and amplifying the credit and asset price risks that are emerging in the context of strong capital inflows into the region.”

Economists are fond of speaking in the abstract so that the ordinary man or woman would not be able to understand them. Anyway, here is my take on this statement.

Overheating is a term used for a commodity or asset that is overpriced because of speculation. When it overheats, the price would free fall closer to its real value. Demand-boosting measures being undertaken by governments generally are government spending in infrastructure projects (fiscal measure) and lowering of interest rates (monetary policy). These are the very measures the Aquino government has been doing: boosting the construction industry through infrastructure projects, and lowering the interest rate in order to encourage investments. But of course, what went into the country are portfolio investments.

The World Bank is actually warning against the continuous boosting of the construction industry and construction-related services because soon it would free fall to its real value, according to the true state of the economy, an example of which could be a glut in the real estate sector, especially of condominiums. It is also warning against keeping interest rates artificially low as it would have to rise soon also because of the true state of the economy, which is cash and capital-strapped, and as soon as flighty portfolio investments leave the country.

For these reasons, we could kiss our dreams of achieving a developed economy status in the near future goodbye. That is, unless there would be a radical reorientation of the economy. (

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