Phl needs to restore investment confidence

According to the latest report of GlobalSource Partners on the Philippines written by former Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo and Wilhelmina Manalac (who was also a high-ranking BSP official), the Philippine government needs to “restore the foundations for sustained, investment-led and productivity-driven growth” if it wants to truly grow the Philippine economy moving forward.

Otherwise, they warned, “further disappointing” growth numbers may lie ahead.

In their Aug. 11 Philippine report, the two analysts pointed out that the recent first half growth figure of 2.6 percent presents several disturbing figures that “points to a weakening of the economy’s capacity to expand in the future.”

According to Guinigundo and Manalac’s analysis, the composition of the growth shows that  while agriculture, forestry and fishing production grew by 2.7 percent and services by 4.5 percent, industry contracted by 2.4 percent — with the main contributors to overall growth being  wholesale and retail trade, education and manufacturing.

However, on the expenditure side, they cited, “the picture is more troubling. Household final consumption expenditure grew by only 2.8 percent, down from three percent in the first quarter.” The figure is particularly important, they said, because household consumption accounts for roughly two-thirds of the country’s gross domestic product or GDP.

They noted that “a consumer sector growing at less than three percent is hardly consistent with an economy capable of sustaining five to six percent growth.”

Government consumption, they acknowledged, “provided an important offset, increasing by 8.3 percent. Exports also performed strongly, growing by 12.2 percent, while imports increased by 5.5 percent.”

What concerns them is that even with the growth in exports of 12.2 percent  and imports of 5.5 percent for production, “these gains were overwhelmed by the sharp contraction in investment. Gross capital formation fell by 9.2 percent following a 3.3 percent decline in the first quarter. This means that investment has now become a major drag on growth rather than a source of it.”

Furthermore, they highlighted the slowdown in construction. According to their report, “The most  disturbing element was construction. Construction contracted by 14.8 percent, with public construction falling particularly sharply. Durable equipment investment also declined significantly.”

They warned that “this is not simply a story about one bad quarter. It points to a weakening of the economy’s capacity to expand in the future.”

Investment, Guinigundo and Manalac stress,  “is what expands productive capacity, It creates jobs, improves productivity, introduces new technology and raises future potential output. When investment contracts sharply, the consequences extend well beyond the quarter in which the decline is recorded.”

They elaborated that “the contraction in public construction is particularly significant. The government’s efforts to investigate irregularities in flood control and other infrastructure projects are necessary. Public money must be protected, procurement must be transparent and those responsible for corruption must be held accountable.”

They expressed the view that the appropriate response to corruption “ is not to paralyze legitimate infrastructure spending. It is to improve procurement, project selection, monitoring, auditing and accountability so that good projects can proceed while bad projects are prevented.”

They continued that the current slowdown in infrastructure project “suggests that this distinction has not always been sufficiently maintained.” As such, they acknowledged, “Tighter control may be necessary in the short term, but if the projects are delayed because agencies are uncertain about procurement rules, fund releases or administrative approvals, the economy pays a price. Public expenditure is not merely a budgetary expenditure; it is also an investment in the economy’s future productive capacity.”

The GlobalSource Partners report emphasized that “the Philippine economy does not merely need more spending in the second half of the year. It needs a stronger foundation for private investment and productivity.”

They, therefore, recommended  that the first priority should be to restore confidence in the investment environment, particularly in dealing with longstanding problems involving regulatory uncertainty, slow permitting, infrastructure gaps, high logistics costs and delays in the judicial system.

The second priority, the report suggested, should be to develop a much clearer industrial policy.

Guinigundo and Manalac argue that “the Philippines cannot depend indefinitely on consumption, remittances, business process outsourcing and traditional services to generate the growth required to raise living standards. The country needs more investment in manufacturing, technology, higher-value services, digital industries  and industries where the Philippines has genuine comparative or emerging strategic advantages.”

They cited the country’s mineral resources as an example “as it offers an opportunity to move beyond simply exporting raw material toward higher-value processing and manufacturing, provided environmental safeguards, governance and investment rules are established and credible.”

The third priority, the report puts forward, is human capital, but they noted that there is a learning deficit constraint. Education reform, they agree, must both be treated as a social sector issue and an economic growth strategy.

The fourth priority would be food and energy security as repeated food-price and energy shocks undermine real household income, increase production costs, and complicated monetary policy. Structural reforms in agriculture, logistics, energy infrastructure, competition and market organization are also essential to sustain growth.

And finally, the report concludes, “the government needs to strengthen institutions. Good governance is not separate from economic policy. It is a pillar of economy policy. Corruption, weak procurement, political uncertainty and inconsistent implementation raise the cost of doing business and reduce the willingness of both domestic and foreign investor to commit capital for the long-term.”