“The government is spending so much on infrastructure program that a significant amount of our dollar reserves is going out. But it is not yet alarming because the money is being spent on projects that will have long-term benefits.”
The twin data released by the Bangko Sentral ng Pilipinas (BSP) before the weekend, showing spiraling inflation and dwindling dollar reserve, could easily paint an impression that the economy is “in the doldrums,” as President Rodrigo Duterte himself declared.
The administration’s economic team was quick to allay public fears, however, saying that government’s policies would ultimately deliver inclusive development for which the country has long aspired. Jess Varela, director general of International Chamber of Commerce Philippines, said the reports are “not a cause for alarm.”
A look at the hard facts will show that while the inflation rate in June exceeded government forecasts, the economy remains strong and is, in fact, one of the best performers in the Asian region in the second quarter.
“You look at the facts – not impressions, not perceptions, but the hard facts, and you’ll be convinced that it’s not the case,” Budget Secretary Benjamin Diokno declared. “We continue to make strides in the fiscal sector of the economy, and this is confirmed by the spending data.”
The budget chief said the high government spending “should translate to better outcomes in the real economy, which is more jobs for our people, improved standards of living, and robust economic activity.”
Number don’t lie
In the second quarter of this year, the Philippines’ gross domestic product (GDP) expanded by 6.8 percent, second only to India and Vietnam and at par with China. The strong result also marked the 10th successive quarter for the country’s GDP to post 6.5 percent or higher.
Even credit rating agency S&P Global Ratings maintained its bullish outlook towards the Philippines and expressed confidence that a 6.5 percent or higher GDP growth over the next few years was “very easily achievable” on the basis of the country’s economic policies.
S&P Asia Pacific Economist Vincent Conti made this prediction despite the economic spoilers, including the inflation, weak peso, rising oil prices, which could hamper the domestic economy’s growth range. He said the demographic trends are very favorable as these “continue to benefit the Philippines, particularly providing a very mobile and effective labor force that has generated a lot of investments and consumption onshore.”
On Thursday, the BSP released its latest inflation data showing a five-year high of 5.2 percent rate in June, higher than the compared to 4.6 percent in May.
A day later, the BSP reported that the country’s gross international reserves (GIR) fell to $77.68 billion as of end June, lower than the $79.2 billion GIR in May.
BSP Governor Nestor A. Espenilla Jr. said the month-on-month decline in the GIR level was due mainly to outflows arising from the foreign exchange operations of the BSP, revaluation adjustments on the BSP’s gold holdings resulting from the decrease in the price of gold in the international market and payments made by the national government for its maturing foreign exchange obligations.
The BSP said the value of its gold holdings slipped 3.5 percent to $7.91 billion in June from $8.19 billion in May.
But, according to Varela, these twin reports of rising inflation and declining dollar reserve are not a cause for alarm and, in fact, would benefit the country in the long term.
“This is a non-issue,” Varela told the Daily Tribune. “The government is spending so much on infrastructure program that a significant amount of our dollar reserves is going out. But it is not yet alarming because the money is being spent on projects that will have long-term benefits.”
From January to May, the government has already spent P281 billion or more than $1 billion per month on infrastructure, an increase of 42 percent over the same period last year. Most of the money is spent on capital equipment that translates to “return on investment,” Varela said.
The Duterte administration’s massive P8 trillion ($150 billion) “Build, Build, Build” (BBB) program has solid potential to finally super-boost the economy and provide inclusive growth that will benefit a majority of the Filipinos, he said.
In the meantime, Varela said the public needs to endure the traffic and other inconveniences brought about by the 75 big-ticket projects under the BBB and enjoy their gains once completed.
Payment of maturing obligations is also a good indication the Philippines is a reliable debtor, Varela said. One reason the country is enjoying good credit standings from lending institutions is because the country has never defaulted on its payment.
“If you will note, the country has never experienced difficulty in raising funds for its projects. Creditors are always ready to provide us financial windows because of our ability and willingness to pay all our obligations,” he added.
Besides, Varela said, there are mitigating factors to offset the decline in the country’s dollar reserve as the so-called BER months are approaching (September, October, November and December) when Filipinos abroad send more dollars to the Philippines, as well as earnings from the business processing office (BPO).
On the weak peso, Varela maintained that this scenario is actually beneficial to a significant number of Filipinos and the export sector. More than 10 million Filipinos are working abroad, sending nearly $30 billion in remittances every year.
“If you have a favorable exchange rate, this would encourage Filipinos abroad to send money to the Philippines because of the bigger conversion rate. Their relatives here will have more money to spend, which in turn further boost liquidity,” he added.
His views reflect the analysis made by First Metro Investment Corporation (FMIC) and the University of Asia & the Pacific (UA&P), which says that while the weakness of the peso may seem negative, its impact in both the short and medium terms is positive.
When the peso-dollar exchange rate crossed the P53/dollar on June 11, a lot of people including foreign analysts raised their “worried” flag. In the following days, the peso slid further to some 5.8 percent, higher than the P50.40/dollar average in 2017. This posts the question, should we worry?
“If we take a longer view, the peso has actually appreciated by only 4.6 percent from 2004 to June 13, 2018, while our neighbors Indonesia and Vietnam had large cumulative depreciation in excess of 40 percent during the same period. Malaysia also shows net depreciation during the period,” explained First Metro and University of Asia & the Pacific (UA&P).
It said the US dollar has been strengthening since the end of the first quarter of 2018 due to several reasons. The IMF projects the US economic growth to accelerate to 2.9 percent this year compared to 2.3 percent in 2017. Apart from the growth momentum, the effects of Trump’s tax cuts will be felt by individuals and corporations starting in the second quarter of 2018.
Department of Finance Undersecretary Karl Chua last week explained the nature and effects of the government’s economic programs. He said that under President Duterte’s leadership, the economic team has been making a “careful balancing” of short-term benefits for the people with the long-term public welfare and allocating resources in such a way that the net profit would be for the greater good of the higher number of Filipinos.
The infusion of P33 billion per month into the economy as a result of the additional spending power of Filipinos, coming mainly from the sizable cuts in personal income tax (PIT) rates under the Tax Reform for Acceleration and Inclusion Act (TRAIN), has temporarily driven up inflation, but in a “good and productive” way, Chua said.
According to Chua, this additional P33 billion comes from the following: P12 billion from lower PIT rates, P2 billion from the Unconditional Cash Transfers (UCTs) for poor families, P3.5 billion from money saved from the free tuition in State Universities and Colleges (SUC) and P15 billion from wages from new infrastructure projects under the “Build, Build, Build” program.
Finance Secretary Carlos Dominguez III added, “This will be a dramatic achievement. It will be a sea change. As soon as we are able to reduce poverty to that level, the task of completely liberating our people from misery becomes a lot easier.”
The administration’s twin pillars for economic inclusion—the comprehensive tax reform program and massive infrastructure buildup under the BBB initiative—will “produce a revolution” in the country’s economic development and raise per-capita income to the level of high-middle income economies by 2022, Dominguez said.