Step into or stuck in the upper middle?
Investors and creditors may view the new classification as a signal of continued development and readiness for capital.
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Investors and creditors may view the new classification as a signal of continued development and readiness for capital.
There were two important things that happened last week. Firstly, DAILY TRIBUNE celebrated its 26th anniversary. Happy Anniversary, Tribune!
Secondly, the World Bank (WB) declared the Philippines an upper middle income (UMI) country.
What this means is that based on the Atlas method of estimating the Gross National Income (GNI), the Philippines is grouped with other countries earning an annual income in the range of US$4,636 to US$14,375.
The GNI is like the Gross National Product (GNP) in the sense they both measure income from Filipinos. Regardless, the new classification means we have entered a new league — and the membership comes with consequences.
Frankly, it is difficult to form a definitive opinion with the new classification. Just like that good ol’ western, there is the good, the bad, and the ugly.
The good. The government has positive things to say about our upgraded income status, and it is all true. We should welcome the upgrade because it affirms all the reforms done over the past four decades. From trade and investment liberalization, fiscal and tax reform, electric power industry reform to the establishment of the Bangko Sentral ng Pilipinas (BSP) are among the critical changes that we have made that has allowed the economy to grow and incomes to achieve this level of development.
Are there benefits to this UMI status, you might ask. There is no direct benefit, but this status does improve our reputation from an economic standpoint. Investors and creditors may view the new classification as a signal of continued development and readiness for capital.
In the eyes of the Department of Economy, Planning and Development (DepDev), the status reflects the resilience of the economy, which again can support investor confidence.
The bad. Are there any consequences to the new status? Just as it improves your reputation, it also means that the preferential treatment you received as a former “poor” nation will no longer be there. Concessional loans and preferential rates from the World Bank and Asian Development Bank for poorer countries in the region in the form of Official Development Assistance (ODA) funding will gradually be phased out. Projects such as the Metro Manila Subway and the planned Bataan-Cavite bridge rely heavily on ODA funding. Concessional rates from the Japan International Cooperation Agency (JICA) could be less than 1-percent but with the new status, the application of their standard rates could mean interest expense that would be ten to 20 times higher.
For example, for a US$1-billion loan that is priced at a 0.10-percent ODA rate that becomes 1 to 2-percent under the new income status, the annual interest cost can shoot up from US$1 million to US$15-$20 million (roughly P900 million to P1.2 billion).
Paying this additional interest cost becomes an issue for current and future generations of taxpayers. What is clear is if we want ODA funding, we cannot afford to have delays in the funded projects because this adds to the cost and pressure on our creditworthiness.
The ugly. We need to realize also that despite the upper middle brand, we are still at the middle of the middle-income spectrum — just slightly better off than 47 other countries. Achieving UMI does not necessarily reflect robust growth in income.
It was not just the Philippines that got an upgrade. Countries such as Jordan, the Federated States of Micronesia, Sri Lanka and Vietnam joined us as UMI. Except for Vietnam, GNI in the new UMI countries are dependent on overseas remittances. In contrast, Vietnam’s GNI is based on export-led growth. In other words, we are UMI in large part because of our overseas workers.
The conclusion here is that we should take the UMI status with a pinch of salt. As a label it does not tell us we are rich. We are far from that status. What it says is that we currently earn enough to no longer need a lot of help from our richer friends like before.
The questions now are: do we want to earn more than, if not the same, as our peers or not; and if we say yes, what are we prepared to do about it?
