State of the PH in 2018: The Insulted Economy

WHAT is the true state of the economy, and the status of economic and policy reforms, under two years of the Duterte administration?

What follows is the presentation, by text and graphics, of Dr. Emmanuel S. de Dios of the University of the Philippines School of Economics, at the forum on “Democracy and Governance in the Philippines: Deficit, Surplus, and Unfinished Business” that was organized by the Philippine Center for Investigative Journalism, in partnership with the Office of the Ombudsman of the Philippines and the Right to Know, Right Now! Coalition, on July 5, 2018, in Pasig City, Metro Manila.

SETTING THE BASELINE:
Ex ante developments justify high expectations

1. “Demographic dividend”
– a growing population of working age
– expansion of a middle class
2. Favourable global environment
– global low interest-rate regime
– liberal migration and trading regimes
– low energy prices (shale oil revolution)
3. Technological developments, esp. in ICT
4. Reforms by past administrations (Arroyo and Aquino)

Growth acceleration 2011–2018?
* Eight years of per-capita GDP growth of 3.5% or more
* Per-capita GDP growth 2% higher than the past period
* Higher per-capita income than ever achieved before
* Actual record: 4.46% v. 2.75%

Absent economic crises
* Current-account surpluses 2005–2016
* Fiscal primary surpluses 2011–2015
* Diminishing debt burden: interest/GDP fell from 5.3% (2005) to 2% (2017)
* Inflation at low single digits
* Declining poverty incidence from 26.3% (2009) to 21.6% (2015)

Unexploited potential
* Growth rates still substantially below what other countries achieved in similar episodes – and below government’s own targets of 7-8 percent.
* Demographic dividend not fully used: shrinking labour force and fewer jobs despite a growing population.

Growth accelerations

Seventh place, not third in 2017

Even Laos and Cambodia grew faster

Smaller labour force, fewer jobs?

0-10 point agenda
0. Fight crime and corruption.
1. Maintain macro, trade, fiscal, and monetary policies.
2. Progressive tax reform, effective tax collection; tax indexation
3. Competitiveness and ease of doing business.
4. Spend up to 5% of GDP on infrastructure; key role for PPP.
5. Rural and value-chain development.
6. Security of land tenure.
7. Invest in health and education; skills matching.
8. Promote S&T and arts.
9. Improve social protection and CCT
10. Strong implementation of planned parenthood

The administration’s analysis and strategy
* Identify infrastructure bottlenecks as main constraint to growth
* Hence the “3-Build” programme
* Allowance for higher deficit ceiling up to 5% of GDP
* Emphasis on public infrastructure spending
* To keep deficit in check (at 3% of GDP), a tax reform programme (TRAIN 1-5).

Surprises
* Government continues to miss its growth targets.
* Government continues to underspend and fall below its total deficit and infrastructure spending targets.
* But current account and BOP surpluses have already been reversed.
* And inflation has broken through government targets.

Deficits and infrastructure

* Government continues to underspend relative to its own infrastructure and deficit targets.
* Missed infrastructure and deficit targets undermine the case for new taxes.
* Few flagship projects have gotten underway (2018?); infra- spending mostly on maintenance and repair on standard projects, e.g., roads. (Q: How much is net investment?)
* A notable shift towards ODA and away from PPP (contrary to 10-point agenda).
* Public sector deficit and infrastructure spending (as % of GDP)

Reasons for underperformance

* Tedious government procurement procedures
* Old problems still unsolved, including ROW, BAC rules
* Technical deficit among government personnel
* Planning, project preparation, bid evaluation
* Supply constraints on private contracting sector
* Shortage of qualified local firms for big projects
* Shortage of skilled staff (engineers and planners)
* Red tape even in ODA projects
* Old problems

Unintended consequences
Fiscal space with additional revenues, combined with infrastructure underperformance provides opportunities for:
* Populist measures: unconditional transfers (₱40 bn); free college tuition (₱40 bn); salaries for uniformed personnel (₱60 bn); universal health care improvements (₱90 bn); free irrigation services
* Feeding frenzy: E.g., DOT, DepEd purchasing scandals, foreign and local trips among executives

Lax infra spending: repair and replace versus new investment
Revenues intended for BBB may be pre-empted by consumption spending and waste. As a result revenue generation may have to run simply in order to stand still. A disruptive process.

New inflation (deed of many hands)
1. Impact of TRAIN through fuel and “sin” products
2. Exchange-rate movements because of capital outfloqws and behind-the-curve monetary policy
3. Muddled rice policy
4. Failure to account for inflation expectations

Inflation in the CPI and food

US Fed funds rate and BSP RRP rate

Competitiveness and ease of doing business
* Export competitiveness slight upward tick but well below comparators
* From 28.4% of GDP (2015) to 28.0% (2016) to 30.5% (2017)
* FDI rising but well below comparators
* From 1.9% GDP (2015) to 2.7% (2016) to 3.2% (2017)

Ease of doing business rank has fallen 
from 99 (2016 and 2015) to 113 (2017)

Corruption perceptions rank has fallen
From 95 (2015) to 101 (2016) to 111 (2017)

Exports of goods and services
(as % of GDP; 1998-2017)

Foreign direct investment inflows
(as % of GDP; 2010-2017)

Ease of doing business 2017
“Distance to frontier” and (rank) [WB 2018]

Ease of doing business [WB 2018]

Corruption perceptions (index and rank 2017)

0-10 point agenda

insult (noun): in medicine: an event which causes damage to a tissue or an organ
– Oxford English Dictionary

INGLORIOUS INSULTS TO THE ECONOMY

1. Uncertainty insult

2. Redistribution insult

3. Selectivity insult

4. Impunity and threat insult
5. War and disorder insult

Despite the President’s seeming disinterest in economic policy, what throws a shadow over business and the economy is the demonstration of overarching power – power without checks, without accountability, and without regard for custom, values, or history.

More than the soundness of policy, it is unbridled power – and its selective application – that is the source of worry for business and the people under the Duterte administration.

— Presentation delivered at the PCIJ Forum on “Democracy & Governance in the Philippines: Deficit, Surplus, and Unfinished Business”, July 5, 2018, Pasig City, Metro Manila