Arroyo's economic growth record on shaky ground

On the face of it, the recent growth in the Philippine economy deserves some applause. After all, the growth was achieved amid the clutches of the recession that has stalled economies big and small across the globe. However, before we start jumping up and down like monkeys celebrating the Arroyo administration’s “33 consecutive quarters" of growth, it might be useful to remember that the Marcos regime had claimed a much longer period of continuous economic growth. During that growth, however, the Philippines actually slumped from its enviable position of the second-richest economy in Asia, next only to Japan, to one of the poorest, a “basket case" that at one point could not even afford to pay for imported raw materials badly needed by its industries or to provide jobs to its people. In the current case, the economic growth still fails to touch the lives of a great number of the Filipino people. There is widespread incidence of poverty and hunger, apparently still to get worse as the global slump persists. Lower unemployment rates are being reported by the government but daily we see crowds of young and old citizens jamming recruitment offices in search of livelihood opportunities abroad which remain scarce here at home. With the slim growth in the first three months of 2009 – gross domestic product (GDP) inched up by a mere 0.4 percent – obviously there is not enough going around for the ever-increasing population.

The question therefore persists: If there is real economic growth, why is there sustained general public dissatisfaction with top government institutions and officials, President Gloria Macapagal-Arroyo not excluded? If there is real economic growth, who is benefiting from it? Apart from its focus on taxation as a way of instilling macroeconomic stability, what else is the government doing to keep the economy in step with growth demands of the 21st century? If there is anything that the government should strive for in boosting the economy, it is “quality growth." This is growth that is driven not by consumption alone but also primarily by exports and investments. Apart from the slower exports (down by 18.2 percent in the first quarter compared to earnings the year before), capital formation, the GDP account that tracks investment patterns in durable equipment and construction, has also continued a decline that started in late 2008 as the global financial crisis spooked businesses. If the Philippine economy has “not suffered much" from the current global recession, as government officials often proclaim, it could be that it has never been a strong player on the world export market in the first place. The economies that suffered the most in the past months were those producing in large quantities a range of goods for export, for the simple reason that their trading partners have either reduced their imports of certain product lines or halted them altogether. That the Philippine export sector was not in the driver’s seat when the economic crisis erupted could be viewed as a “blessing". This is reminiscent of the Philippine experience during the Asian financial crisis of 1997. It will be recalled that the Philippines was “largely unscathed" from that meltdown that saw Asia’s debt-ridden economies suffering reversals of fortune. The bigger the debt burden was, the more painful the adjustment became during that crisis. Why didn’t the Philippines suffer as much? Because its own foreign-exchange crisis in the mid-1980s prevented it from partaking of the cheap debt available at the time. The Philippines’ adjustment therapy had come more than a decade earlier. Behind the growth No doubt about it, the economic growth of recent years has largely been sustained by money remitted home by the roughly 10 million Filipinos working abroad. For the first six months of 2009, for instance, these remittances could have reached the equivalent of around P400 billion, based on data from the Bangko Sentral ng Pilipinas. The significance of the remittances to the economy can be appreciated when compared with the government’s total tax revenues for the same period—P545.7 billion, not even enough to meet its planned expenditures so that it ended the period with a huge deficit. Overseas Filipinos’ remittances eventually translate into consumer spending in the country. As a source of growth in GDP, which is the value of all goods and services produced within the country, consumer spending continues to account for the lion’s share owing to the weak performance of the country’s export and investment sectors. In the first quarter this year, for instance, personal consumption expenditure made up nearly 77 percent of GDP. More recently, analysts have detected consumers holding back on their spending, opting to keep their cash under mattresses apparently in anticipation of prolonged hard times. Economists have been looking forward to spirited consumer spending as a way out of the pervasive recession, a pattern in past slowdowns which helped businesses pull themselves out of the rut and start producing in earnest and creating jobs again. If the consumers’ frugal ways continue, the recovery can only come from more aggressive government spending and investment in such areas as infrastructure. The problem is the Arroyo government can ill afford to spend more now without growing its debt stock. For the first six months of the year, the government spent some P153.4 billion more than it earned in taxes and customs duties. That gap was, according to finance officials, more than eight times the deficit in the same period last year, although it was still a few hundred million pesos below the ceiling the government had set. Tight finances Such deficits in the government’s fiscal position have invariably been plugged with new borrowings. This year is no exception. In preparation for new projects that would require large sums, the national government went to the foreign bond market in January worth $1.5 billion. Last week, the Philippines, recognizing that it needed more cash amid an already huge deficit, returned to the Asian bond market with another issue of $750 million worth of 10.5-year bonds. That last bond issue had a coupon rate of 6.5 percent, which means the government committed itself to paying $48.75 million in interest annually for holders of these bonds. By way of comparison, on the same day the Philippines launched its last bond issue, South Korea’s state electricity company made its own bond issue and the debt paper fetched a coupon rate of 5.55 percent paid semiannually. This does not augur well for the Arroyo government’s ability to maintain a healthy fiscal position. That $750-million float just made the Philippines the largest bond issuer in Asia, and the next time it approaches the market again the cost will probably be stiff. The only logical next option available for the finance authorities, when they seek new borrowings again, is to go to the local market. That can only mean crowding out private borrowers for funds—and a potential for unusual increases in domestic interest rates. Amid all this, private industries may have to wait longer for that recovery in domestic consumption. The decline in the overall industry (by 2.1 percent in the first quarter) may not be the last yet. On the other hand, the services sector, which now accounts for the biggest share of employed citizens in the country, has also shown weaker tendencies, in contrast to big increases in value-added to the economy. If tighter regulations on the telecommunications firms are put in place, the services sector might yet slide into a contraction for the first time. When President Arroyo makes her State of the Nation Address next week, it will be good for her to keep in mind that economic growth under her watch remains vulnerable. There will be a need for an active government involvement through viable policy measures. Strong-arm tactics and politics-minded skullduggery will not work. Ping Galang is a veteran economics journalist.