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Philippine economy plays catch-up

After a blip in the first few months of 2019, the Philippine economy is steering itself back on a stronger growth track.

Philippine economy plays catch-up
High-rise buildings in Bonifacio Global City, also known as the Central Business District in Taguig City. Manny Palmero
Economic managers of the Duterte administration and even analysts from the private sector are one in saying the economy is bound to recover in the second half from the sluggish 5.6-percent expansion in the first six months.

They see the delay in the approval of the national budget for 2019—which primarily caused growth to dip to a four-year low of 5.5 percent in the second quarter—as a “one-off” that could be offset by the government’s efforts to accelerate fiscal spending in the remaining months of the year, particularly on infrastructure projects under the unprecedented and ambitious “Build, Build, Build” program.

Economic Planning Secretary Ernesto Pernia said in an forum organized by the Economic Journalists Association of the Philippines Aug. 27 that the previous growth target of 6 percent to 7 percent remained doable.

“We are hoping to achieve the low end of the target range, which is 6 percent. Meaning, we must average by 6.4 percent in the second half to achieve this,” Pernia told business reporters, editors and columnists.

Despite the promising outlook, Pernia said it would require a redoubling of efforts of the government, especially on public spending in infrastructure projects on a “24/7 work mode.”

The Philippine Statistics Authority said economic growth in the second quarter further slowed to a four-year low of 5.5 percent from 5.6 percent a quarter ago and 6.2 percent a year ago, weighed down by the El Niño dry spell, rising protectionism in advanced economies, delay in the approval of the national budget for 2019, and the ban on construction activities in the run-up to the midterm elections last May.

The sluggish and slower-than-expected expansion for the April-to-June period was the slowest since the 5.1-percent GDP expansion in the first quarter of 2015. It was also the second successive quarter that economic growth stood below 6 percent.

The performance brought the first-half GDP average to just 5.6 percent, below the low end of the target range of 6 percent to 7 percent earlier set by the government for the entire year.

President Rodrigo Duterte affixed his signature to the P3.7-trillion budget for 2019 in April after months of impasse between the two houses of Congress. As a result, the government operated on a reenacted budget that slowed economic growth in the process.

Strong household spending

Data provided by Finance Undersecretary Gil Beltran, the DoF’s chief economist, showed that household consumption remained robust, equaling last year’s first-half growth at 5.8 percent as consumer prices have trended down following quick response by the President on the streamlining of food supplies.

Economic Planning Secretary Ernesto Pernia
All other expenditure components declined—government consumption, from 12.6 percent to 7.1 percent; capital formation, from 14.9 percent to -0.1 percent, and exports, from 12.6 percent to 5.0 percent—as trade tensions rattled international value chains and dampened global investment.

But what is notable is that “private construction and services also maintained robust growth, providing hints of a quick recovery moving forward,” Beltran said.

He said the pickup in private construction from 6.5 percent to 23.1 percent cushioned the decline in public construction. Private construction contributed 1.1 percentage point to the 5.5-percent growth in the first semester, tempering the negative contribution of public construction of minus 0.7 percentage point.

“Had the growth in public construction been at most zero, GDP growth could have reached 6 percent,” Beltran said.

Services rose from 6.7 percent last year to 7 percent, with the financial sector paving the way, from 7.7 percent to 9.7 percent.

But agriculture continued to be the laggard, almost not moving from its 0.7 percent semestral growth.

“Nevertheless, the fiscal sector remains strong and can support higher growth. In the first semester, national government revenues rose by 0.4 percent of GDP, boosted mainly by tax revenues,” Beltran said.

Short-term strategies

Pernia cited a number of short-term strategies to ensure a more inclusive economic growth in the next couple of years. These include the full implementation of the Ease of Doing Business and Efficient Government Service Delivery Act of 2018, modernization of government regulatory and other processes and the proper utilization of the Rice Competitiveness Enhancement Fund to enhance the productivity and competitiveness of the rice sector.

Pernia said lawmakers must now be aware of the consequences of the delayed approval of the national budget to economic growth. He even urged lawmakers to pass on time the national budget for 2020 to make sure economic growth will be sustained. The Department of Budget and Management has proposed a record P4.1-trillion national budget for 2020.

Risks to growth

Pernia cited an array of external and domestic risks that could stifle growth going forward and derail the government’s ambition for the economy to continue outperforming most of its peers in the region.

From the external front, these are the easing of global growth, lingering trade tensions between the world’s two leading economic powerhouses US and China, volatility in global oil prices and disruptive technologies that could displace labor force.

From the domestic front, risks could emanate from natural hazards, power disruptions and energy sector challenges, delays in infrastructure projects, absorptive capacity of local government units to carry out devolved functions, and policy uncertainties.

“We remain vigilant and well-positioned against these downside risks to growth,” Pernia assured.

The slower-than-expected economic expansion in the first half compelled the International Monetary Fund to lower its growth forecast for the Philippines this year and in 2020.

Yongzheng Yang, IMF’s resident representative to the Philippines, said the multilateral lending agency slashed its GDP growth forecasts to 6 percent this year and to 6.3 percent for next year.

The latest projections are lower than the previous forecasts of 6.5 percent for 2019 and 6.6 percent for 2020.

Yang said the downward revision reflected weaker-than-expected external demand and weaker-than-expected public investments, partly due to the delayed approval of the national budget.

But Yang said despite the revised forecast, the forecast was still among the highest in the region, and that growth would continue to be driven by strong domestic demand.

Meanwhile, global debt watcher Moody’s Investors Service for the second time this year trimmed its growth forecast for the Philippines in 2019 to 5.8 percent from the previous estimate of 6 percent, taking into account the lackluster expansion in the first half.

Moody’s said in a report late August that the budget delay exacerbated external weakness and although domestic demand was seen to recover, it would not be enough to propel growth to at least 6 percent.

Moody’s already reduced the GDP forecast for the Philippines this year in May to 6 percent from 6.2 percent because of the 5.6-percent growth in the first quarter, due to the budget delay.

Topics: Ernesto Pernia , Economy , Economic Journalists Association of the Philippines , International Monetary Fund
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