What's going on with the economy?

I am often asked why the peso is skidding and if it will again be P50 to the dollar. Why shouldn’t the peso skid against the dollar? The dollar is gaining strength such that even the euro, the pound and the yen are giving up past gains. Despite American consumers in recession mode, American exports are up and their trade balance has improved tremendously lately. And because consumers are not buying as much, American imports are down and contributing as well to a favorable trade balance.

As for us, our exports are down and have been for a while. It is also the traditional Christmas buying season and traders are buying a lot of dollars to pay for goods they will sell this Christmas season. And while oil import costs have gone down, the big oil companies are still paying for expensive oil they got on 60 to 90 days credit.

Portfolio investments or hot money in the stock exchange have fled and have not come back, thus cutting a rich source of dollars that in the past helped make a strong peso. And forget foreign direct investments or FDI to bring dollars to our reserves. We are hardly getting any. The only dependable source of forex today are OFW remittances but perhaps, even a reported increased flow is not enough to support the peso to stay in the low to mid 40s range in today’s environment.

The forex situation is however, just symptomatic of our economic problems. While Malacañang is partially right when it points to the impact of the worsening world economic situation, our woes today had been there for a very long time and only gets worse every time the world’s leading economic powers starts having serious problems of their own.

Ate Glue can no longer make the erroneous claim (specially because of her Economics PhD she should know better) the economy is a bright spot in her watch as evidenced by a strong peso. NEDA Chief Ralph Recto admits even the low end of the recently revised gross domestic product (GDP) of 5.5 percent this year may be too high for the country to meet, considering that double-digit inflation is expected to continue until the end of the year.

To get a sense of what’s going on, I want to share today the position paper prepared by the Foundation for Economic Freedom (FEF) for the meeting of the Philippines Development Forum or PDF held last month. The PDF is the primary mechanism of the government for facilitating substantive policy dialogue among stakeholders on the country’s development agenda.

The FEF paper was prepared by newly elected FEF President Francis Varela, former Finance Usec Romy Bernardo and former NEDA Chief Philip Medalla. The PDF conference produced a press release that reported on the discussions which was quite diplomatically worded. I thought the FEF paper is gives a clearer presentation of our problems and what needs to be done.

Here it is.

The Philippines is managing to keep afloat despite an unusually harsh external environment, characterized by turbulent financial markets, low global growth, inflationary pressures and high oil prices. The sustained robust growth in OFW remittances, despite poorer global economic conditions, explains much of this resilience. Remittances provide the country with healthy forex inflows and an important consumption growth driver. Albeit still at high levels, poverty and unemployment in the country have been kept from increasing further by our countrymen’s ability to find employment abroad. 

Reforms undertaken in the past have also contributed to the national economy’s resilience even in choppy global seas. We would like to note the following: a) trade and tarifF reform implemented in the 90s that have helped relieve supply side inflation pressure by allowing low cost imports; b) oil de-regulation that has de-politicized the pricing of this sensitive commodity, thus insulating our fiscal accounts and creating market signals that lead to more efficient resource use; c) fiscal reforms done in 2004 that removed government’s costly subsidy on power rates and raised and broadened the VAT, thus escaping the threat of a fiscal crisis – bringing down the deficit in excess of five percent of GDP to only one percent presently. 

However, much more needs to be done to put the country on a sustainable macro and long term development path.

The economy is almost dependent on a single engine –  hundreds of thousands of skilled workers and professionals leaving the country every year (now accounting for nine million Filipinos overseas, a quarter of the Philippine labor force), sending over a billion dollars every month, the equivalent of over 10 percent of GDP (from only two percent over a decade ago). This is more than the value added of our largest goods export (electronics and semi-conductors), and more than all other flows (portfolio, FDI, debt) combined. Remittances are the key resource not just to support the BOP and to fuel consumption, but as growth driver to important industries – retail trade, telecom, financial services, real estate and housing.

This model however is not one built on a clever design, for who would wish to drive away citizens and break up families, driven not just by superior opportunities but by basic necessity? The challenge to our authorities then is to create the environment that leverages off these inflows and allows these to be used in productive investments – both by the government and the private sector – that will cultivate new growth drivers where the country has natural competitiveness – tourism, BPO, tropical agriculture, mining – so that people over the medium term will have the option of staying home with their loved ones, should they want to.

Unfortunately, the recent record of government in creating an investment friendly environment has been mixed at best.  While the macro situation has improved from the threat of a fiscal crisis faced in 2000, there remains much to be done to provide a globally competitive environment that attracts investors.

The reasons for this were eloquently discussed in the presentation at the PDF earlier this year by the special guest speaker for the private sector, and are well documented in studies done by credible international institutions, including the World Bank/IFC, the World Economic Forum, etc. They point to, among others, to poor infrastructure, corruption, and lack of predictability of policies. 

It is no surprise then that the Philippines received very modest amounts of foreign direct investments over the past years, and, unlike its neighbors, have yet to get back to its pre-Asian crisis investment flow record. Our credit rating which was one notch below investment grade in 1996, has not recovered and is still two to three notches from where we were. Investment, both public and private, is a dismal 15 percent of GDP, a far cry from around 25 percent during the Ramos years. Investments have failed to recover after the Asian crisis even as more seriously affected neighbors have already bounced back.

As we contend with these continuing problems, we have to recognize that the current administration has only less than two years before the end of its term. The challenge, therefore, is to focus on measures that are doable in the next couple of years even as we help set the agenda for the next administration to pursue.

We believe that the best contribution the current administration can make at this point is to focus on programs that do not require lengthy policy debates but could benefit from greater attention and focus in terms of resources, program design, and effective implementation. In this regard, investments in people that have been falling in real terms over the past eight years should be a major focus. Greater investments in education and health, including reproductive empowerment, are long overdue and are critical now if we are to face the real threat of a significant decline in the quality of our human resources in the decades to come.

Due to space limitations, we will conclude this review of the Philippine economy with the rest of the FEF paper in Friday’s column.

Pinoy paradise

Somebody, whose number is not in my directory, texted me this joke.

Modern thinkers and theologians now think Adam and Eve were Filipinos.

Why?

Bcoz dey hav no house, no job, nothing decent to wear, no rice & still dey go out and multiply.

Boo Chanco’s e-mail address is [email protected]