The Philippine Star, 30 May 2012
By Gerardo Sicat
The Philippines was recently referred to as the “comeback economy” in Asia. What that means is that it was once in the league of good economic performers and that it is returning to the same league.
I have written about the brightening prospects for the future and why opportunity knocks. (See, for instance, Crossroads, March 7, 2012.) In the past, the Philippine economy has been an average economic performer among many developing countries. But in comparison with some East Asian dynamic neighbors, it has been the one left behind.
But now, it seems, the horizon has changed for the better. There is still much to be done in the area of reforming the investment climate. However, recent economic developments provide good prospects for growth even under conditions of existing policy.
Two factors account for this. First, good macroeconomic fundamentals have remained in place over at least a decade now. Second, economic changes in the region are making the Philippines an alternative site for relocation, given that production costs are rising elsewhere and that the country has the essential labor pool for future growth.
“Improved economic fundamentals.” In the course of recent years, the Philippine economy grew at an average rate of 4.5 percent per year. During the same period, the fiscal balance was kept reasonably well under control. Also, favorable external conditions also improved.
The Aquino government, which is on its second year in power, kept a tighter fiscal framework compared to the previous administration. Tax collections rose through improved revenue collection efforts. Matched against the public spending that was kept within range of revenues, the government fiscal deficit was kept low.
One feature of this fiscal spending is the shortfall in public investment compared to the planned expenditure. This produced a deceptive fiscal picture. Spending on public investment was lower than expected. In view of the need to raise the level of spending on infrastructure projects, this shortfall has an impact on future performance.
The external sector performed favorably during the same period. OFW remittances and earnings from BPO outsourcing services have been strong performers as earners of foreign exchange. Other exports and the inflows of foreign investments contributed to the rise in the country’s reserve position.
International reserves constitute close to a year’s imports and are equivalent to half a year’s maturing short term obligations. These are sound numbers. Compared to previous years, international reserves constituted a few months of imports and the debt service was much higher.
“Sovereign credit upgrades.” An outcome of the favorable macroeconomic conditions as described above is the change in sovereign credit ratings for the country. The country’s credit ratings have received upgrades.
These credit ratings are, however, still below investment grade. But they have risen from more dismal ratings in earlier periods. Lately, four credit rating agencies have given the country positive outlook in their ratings. In particular, these ratings are: Fitch (BB+), Moody’s (BA2), Standard & Poor’s (BB and positive outlook), and the Japan credit rating agency (positive outlook).
Such ratings are likely to improve further. One day, such ratings could become investment grade. Improved credit ratings mean that the country can get reduced cost of borrowings from the international credit market once it looks for new financing.
“Booming construction and business process outsourcing (BPO) operations industry.” Two sectors of the economy have been booming: construction and BPO operations, especially call centers.
The construction sector has been building up in terms of commercial and residential construction. This has been essentially a private sector driven boom in construction. The construction boom has been partly influenced by the demand for office space, an outcome of the boom in the BPO industry and by strong OFW remittances.
Government infrastructure construction is still relatively weak but it could become the leading sector in construction as more public infrastructure built along the public-private partnership (PPP) model are contracted out.
The Philippines has become a major country in the BPO industry. For the moment, call centers dominate the BPO industry. The foundation for the BPO industry transforming itself into a more knowledge-based industry is now taking root. That would call for more requirements of science and engineering applications in the BPO industry. Initially, call centers were set up to take advantage of country’s pool of young skilled workers who can speak English.
These two sector booms began during the administration of Gloria Macapagal Arroyo. Politics aside, they began growing when the economy overinvested in communications facilities as a result of the liberalization of that sector during the 1990s. As the BPO sector opened up, demand for office construction also perked up.
These booms have continued unabated during the Aquino administration.
“Improved economic indicators.” A number of investment banking houses and other institutions monitoring country developments have been sounding out the good notices about the country.
Economic accomplishment affects perceptions. And perceptions are infectious. They influence investors and public analysts in their judgments about the country.
After the impeachment of a sitting president (Joseph Estrada) for various reasons including corruption, the country’s ratings on competitiveness as well as on indicators of corruption practices worsened. As corruption scandals became a major staple of media news during the succeeding years during the presidency of Gloria Macapagal Arroyo, the country’s standing in these competitiveness indexes did not improved.
Thus, one result of the campaign of President Noynoy Aquino to pin down accountability for corruption on his predecessor might be responsible for the country’s improved ranking in the international competitiveness index as reported by the World Economic Forum, however modest that is. The Philippines moved ten positions in the country rankings, an improvement.
“Auspicious factors will strengthen economic prospects.” There are developments that are already happening that favor Philippine economic prospects. The gloom of Europe and the still weak American economic recovery aside, these developments are happening in the region.
Economic adjustments in China and in Japan are the biggest factors that work to favor the Philippines. And then, when ASEAN becomes a free trade area in 2015, the country will move toward a more integrated and larger regional future and competition.
To maximize the economic gains, the Philippine policy makers cannot just remain passive and predicate that current investment policies will suffice. For one, there is need to maintain a continuing improvement of the country’s macroeconomic management. In addition, contrary to the current view that policy makers can simply reap the benefits of these new inflows of investment under stable policies, it is important that policy makers work hard to improve the investment climate to realize higher growth, greater employment and reduction of poverty.
(To be continued.)
