By Dr Dan Steinbock
Dr Dan Steinbock is an internationally recognised expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies and large emerging economies; as well as multipolar trends in stocks, bonds, currencies, and commodities.
Today, there is a huge gap between the Philippines as it is portrayed by many international observers and the country’s fundamental economic realities.
The Duterte win was the triumph of ordinary Filipinos. Accordingly, there is only one way for the government to succeed. It must deliver the country’s economic promise.
Unlike its predecessors since 1986, the Duterte administration has potential to do so—unless the year-long efforts at regime change by foreign interests in cooperation with domestic political opposition prove successful.
From fickle finance to long-term jobs
The basic difference between the Aquino and the Duterte administration can be illustrated with their different objectives, as evidenced by IMF data. When the Aquino administration began its rule, portfolio capital inflows increased dramatically, along with other investment and derivatives. However, foreign direct investment flows were in the negative.
Such financial flows and derivatives reflect short-term interests by foreign financial interests. These flows are fickle, can cause dislocations and have little loyalty to markets they seek to exploit.
The contrast could not be greater with the Duterte administration. When it began its rule, foreign investment flows increased but portfolio and other financial investment dived.
Foreign direct investment (FDI) tends to reflect a longer-term interest by multinational corporates. It brings jobs and capital and is far less erratic relative to financial flows. It seeks stability.
Initially, the Aquino administration promised to bring FDI into the Philippines, but since it was never able or willing to change the legislation accordingly, foreign capital has remained marginal in the Philippines until recently.
Historically, that amounts to lost opportunity costs over three long decades.
Investment-led infrastructure growth
The BRIC-style agenda of the Duterte administration is gaining momentum. The most obvious signals are the ones analysts tend to emphasise. Domestic demand has proved solid. The growth rate of private consumption could remain close to 6% annually. Last year, remittances soared at a record $28 billion, thus supporting consumption growth.
In the foreseeable future, the government’s strong infrastructure push and tax reform plans are likely to maintain momentum. The Tax Reform for Acceleration and Inclusion (TRAIN) seeks to create a more just, simple and effective system of tax collection. The wealthy will have a bigger contribution and the poor stand to benefit more from the government’s programs and services.
Investment growth has potential to stay robust in medium-term, as long as the ”Build, Build, Build” program prevails, especially if the government can raise infrastructure spending to 5% of GDP.
Due to the growth momentum, energy prices and the infrastructure program, inflation could rise up to 4% in 2018. If the inflation trend prevails, which is likely, Bangko Sentral is likely to tighten policy rate from 3.5 to 4.0 by the year-end.
In the current year, the peso could soften from the current 51.40 up to 54.00, relative to the US dollar. However, as the dollar has not appreciated as much as initially expected and as the Chinese yuan has proved stronger than initially expected, the dual impact in Asia could reduce some of the currency pressures.
Toward FDI records, softer external balance
What about foreign direct investment (FDI)? Well, net flows of FDI totalled $7.9 billion from January to October 2017, reflecting confidence in the economy. In the coming years, FDI inflows are expected to rise by magnitude, as they should after three decades of missed opportunities by previous administrations.
In exports growth, the Philippines recently enjoyed a recovery. However, a sustained double-digit increase in imports and decline exports widened the trade deficit to what critics call a “record high” $4 billion in December. Nevertheless, these figures must be seen in the context: What they reflect is the huge infrastructure program, which is bound to increase demand for imports in the foreseeable future – they illustrate an investment in the future, not misguided priorities as often in the past.
Due to import growth, net exports may stay in the negative. Yet, for the full year 2017, total external trade actually grew 9.9%, exceeding the 5.8% growth in 2016. In the longer-term, the Philippines needs to push harder its exports growth. In this quest, it can follow the example of Japan in the postwar era, the newly-industrialized Asian tigers in the late 20th century and China more recently.
The external balance will soften, but the critics’ stated fears are inflated. The 19.5%-debt service ratio remains below the international benchmark range of 20% to 25%. The foreign reserves ($81billion) are well above the IMF reserve adequacy metrics and relatively highest in the region. They are ten times bigger than monthly imports and five times bigger than short-term external debt.
From “people last” policies to expansion through inclusion
Due to the steep Philippines income pyramid, growth must be both accelerated and inclusive. In the Aquino years, the top of the pyramid gained, ordinary Filipinos came second. The political net effect was the Duterte election triumph.
Since only a fraction of the population dominates most of the economy, nine Filipinos out of ten hold very little true economic power. Of these, two or three struggle to remain in the fragile middle class, while every fourth or fifth lives in abject poverty.
Without adequate land reform in the postwar era and with weak job-creation in the past, job opportunities have been inadequate. For decades, governments have coped with the challenge by exporting more than 10 million people. If the Philippines is to become a BRIC economy, that has to end. BRIC economies create jobs at home; they do not export them abroad.
Initially, the “people last” policy evolved almost half a century ago, when land reform failed, industrial takeoff was halted, and infrastructure modernization was suspended. As growth became exclusive, job creation began to linger.
The recent government blueprint for appropriate job creation through employment and entrepreneurship from 2017 to 2022 suggests that the administration seeks to overcome the challenge.
Now the strategic objective is to achieve full employment at 5% unemployment rate, which requires the creation of 7.5 million jobs, especially in key employment-generating areas, including manufacturing, food processing, construction, tourism, IT business process sector and retail trade.
The government is in the rich track, yet barriers remain high.
Toward “people first” growth
Internationally, Duterte’s economic objectives are reminiscent of those in Brazil during President Lula’s golden years in the 2000s. In both cases, the highlight is on elevated growth through inclusion. Under his rule, Brazil enjoyed strong BRIC growth but was also able to reduce the steep gap between the rich and the poor. That, too, is the goal of the Duterte administration.
Indeed, in the Philippine economic pyramid, the potential output could be far higher than it is today. Despite the rhetoric of inclusion in the Aquino era, the Philippine labour participation rate has been around 61%. In view of the country stage of economic development, that should be far higher, as in Vietnam (78%), China and Thailand (69%), Indonesia (66%) and even Myanmar (65%).
The current rate is the net effect of decades of “people last” policies—the country’s economic promise remains strong.
Currently, the base case for economic growth is 6.5%-7% in 2018-19. There is structural potential for 7%-7.5%. But to be an upper-middle-income economy toward the end of the Duterte rule, the country’s economic growth must become more inclusive. It must become growth by, growth of and growth for ordinary Filipinos.
Featured Image Credits: Visualhunt.com
This article was orginally published in The Manila Times
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