January - February 2008
Mad over money

A ‘feel-good’ only economy?

RAMDAM MO na nga ba?

Even the current administration is probably asking itself this question — “Do you really feel it?” — since the recorded performance of the Philippine economy in 2007 surprised everyone, including the government. With GDP growth likely to have exceeded seven percent for the full year, the economy appears to have overshot the government target of 6.1-6.7 percent for the year. And with relatively stable prices manifested in a low inflation rate, and an apparently improving jobs picture as of the third quarter, we are finally seeing good news on all three basic economic yardsticks that the ordinary Filipino can understand: presyo (prices), hanapbuhay (jobs) and kita (income). Inflation (2.8 percent) is well within the 2.6-3.1 percent projected range; unemployment is down to 6.3 percent from last year’s 7.3 percent; and income (GDP) growth (7.1 percent so far) is better than the targeted 6.1-6.7 percent. Until recently, the best we could do was a “two-out-of-three” score, with jobs data having consistently lagged behind the other two indicators.

Is the government’s “ramdam ang pag-asenso” media campaign more than self-serving propaganda then? Is the average Filipino family really now better off than before? Or is it all illusory, too good to be true, and/or too good to last?

First, a caveat on the seemingly positive economic growth data. It is worth noting that the quarterly GDP growth figures reported by the government are year-on-year growth rates, measuring how the past quarter’s output grew over the levels posted in the same quarter a year ago. Other countries report their growth rates by looking at quarter-on-quarter growth (i.e. growth over the immediately preceding quarter), making a statistical adjustment to account for seasonal influences, and then translating the number into an annualized growth rate (i.e. roughly, by multiplying it by four). Growth rates computed this way are more indicative of actual short-term weakening or strengthening in the economy.

Government GNP/GDP data actually provide the seasonally adjusted quarter-on-quarter growth rates as well. And here, the news is not so encouraging: GDP grew a mere 0.3 percent over the past quarter, its weakest performance since 2001. This weakening is seen across the major economic sectors, with the industry sector actually contracting by 0.7 percent, the worst performance seen in the last four years. The decline in exports (-4.9 percent) was clearly the main reason for this, which in turn results from a combination of slower economies abroad (especially in the United States) and the appreciation of the peso.

Still, there are hopeful signs of more broadly beneficial growth. Foremost is the strong showing of agriculture, whose 5.6 percent growth in the third quarter improved on the 4.3 percent average growth posted in the first half, which was already better than the sector’s historical average performance. With over 12 million jobs directly coming from this sector (not counting jobs indirectly linked to agriculture, which are even far more than that), good agriculture performance is good news for the rural economy.

THERE ARE two caveats to this good news, however. One, the sector’s performance has always fluctuated widely across the quarters due to the vagaries of weather — especially now that climate change seems to have made weather patterns so much more unpredictable. Thus, one cannot project an improving trend from just a quarter’s (or even a few quarters’) good performance; the outlook remains unclear. Two, if one looks at quarter-on-quarter growth rather than the usual year-on-year rate that is reported, farm growth has actually been weakening. In the third quarter, the sector grew a mere 1.1 percent over the second, compared to 2.4 and 2.2 percent in the previous two quarters. In other words, agriculture has actually weakened through the course of the past year, even though it strengthened relative to its performance in 2006.

The services sector also shows the same stronger/weaker performance so far. That is, compared to 2006 (5.8 percent), the latest 7.2 percent growth is stronger. But compared to recent quarters (8.8 and 8.4 percent), services growth has slowed down. The boost in services is coming mainly from real estate, which continues to zoom consistently above 20 percent, along with private services, buoyed by the call center and business process outsourcing (BPO) surge, which remains strong at 8.5 percent and better than last year’s 6.1 percent growth.

Meanwhile, it is noteworthy that communication has slowed down to a single-digit 6.2 percent after posting consistent double-digit growth in the past years. Are people texting each other less? Or have lower prices induced by strong competition simply cut the margins of the telecommunications companies?

Another hopeful sign is a steady improvement in investment growth. The most alarming aspect of our recent economic performance had been the low levels of fixed investment (capital formation), on which our neighbors have been leaving us far behind. In fact, while our fixed investments grew at an annual average rate of less than one percent since 2002, our neighbors had been boosting investments at around eight to 20 percent every year. Latest data indicate a 7.5 percent growth year-on-year, with public construction being a somewhat less dominating influence than in recent quarters, which is good news. This time, private construction (13.1 percent) is a much stronger contributor to investment growth; in the past quarter, it grew only 2.2 percent against public construction’s 39.7 percent surge.

Investment in durable equipment is also picking up (3.4 percent against 1.7 percent in the first half), and has reversed its eight-quarter slide since 2005. Investments in breeding stock and orchard development also improved over last year’s performance (3.6 versus 1.1 percent), but was slower than the past quarter’s 7.4 percent growth. We need to be able to sustain and intensify these trends if we are to recover the ground we lost over recent years relative to our neighbors.

NOW LET’S look at another piece of quasi-good news: The third quarter (October 2007) employment data reported fewer unemployed Filipinos compared to a year ago (i.e. by about 372,000 workers). A closer look at the job numbers, though, reveals that unemployment is down not so much because a lot of new jobs were generated in the economy, but because a significantly lower percentage of working-age Filipinos actually decided to look for jobs. Only 483,000 new jobs were actually created in the past year. But there were only 106,000 new jobseekers in the same period, far less than the roughly one million new working-age Filipinos every year, and far less than the new jobs created. Hence, the unemployment rate dropped.

For some reason, more Filipinos are deciding to stay out of the labor force (i.e., not look for a job). Whether this is a good thing or a bad thing is not clear. Either they are not looking for a job because they don’t need to (perhaps because the primary breadwinner in the family is already earning enough), or they may have simply given up looking – but the statistics can’t tell us what really happened. It is likely that the continued surge of overseas remittances has been a factor here; that is, the spouses and working-age children who are left behind feel no real compulsion to work. Indeed, some sociologists have begun to lament over this emerging culture of dependency among youngsters spawned by the OFW phenomenon.

Official data also tell us that more than two-thirds of the new jobs last year came from the services sector. Agriculture actually lost 11,000 jobs, which is bad news for the rural economy. Industry created 182,000 new jobs, with the bulk coming from construction, particularly government construction projects. Unfortunately, these are temporary jobs that last only until the construction project is completed. Thus, sustaining these jobs hinges on the government’s ability to keep up the pace of public construction. The challenge, then, is to make good on the massive infrastructure program the government has lined up till 2010, by ensuring that the revenues are indeed forthcoming to pay for them.

Of the 313,000 new services-sector jobs, the biggest single contributor this time was transport, storage, and communications, with transport (tricycles and jeepneys?) probably accounting for the bulk of it. Real estate and business activities, which include call centers and business process outsourcing firms, and private household employment (maids, gardeners, family drivers etc.) accounted for much of the rest.

As for the out-and-out bad news, these include the fact that certain targets/forecasts were missed in 2007, including those on import growth, the current account of the balance of payments, gross international reserves of the Bangko Sentral (BSP), and tax revenues. Imports were expected to rise by 10 percent, but had averaged only a 4.4 percent growth as of September, having in fact been negative in earlier months. The current account — the difference between current foreign inflows and outflows from trade, tourism, and remittances — has also been in surplus by much less ($3.7 billion) than what was expected ($6 billion). This tells us that even the surge in overseas remittances has not been enough to make up for the shortfall in expected export earnings.

Meanwhile, the BSP has piled up gross international reserves much higher ($34.4 billion, or 5.8 months’ worth of imports) than what was forecast ($26.6 billion, or 4.5 months’ worth of imports). The BSP has obviously been buying up more dollars than it had expected to do, mostly motivated by the desire to arrest the too-rapid appreciation of the peso. In the process, it has been incurring huge losses running into the tens of billions of pesos, as the dollars it buys keep going down in peso value.

But the biggest item missed by the government, and the one of greatest concern to outside observers, is the tax revenue figure. The originally projected total revenues for 2007 had been P1.12 trillion, broken down as P1.03 trillion in tax revenues, and P90.6 billion in non-tax revenues. As of October, total tax revenues for the year had been P756 billion, or less than three-fourths (73 percent) of the full-year target, when five-sixths (83 percent) of the year had elapsed. Then again, non-tax revenues were running at P139.6 billion, or 154 percent of target for the full year. All told, however, total revenues as of October were running at P896 billion, or 80 percent of the full-year target, which is still slightly below what it should have been by then.

Fortunately for the government, it is managing to make up for a projected P55-billion shortfall in tax revenues with an almost equivalent amount in unanticipated privatization earnings. But as most observers keep pointing out, the government cannot keep relying on such non-recurring revenues, and must simply shape up on tax collection efficiency.

NOTWITHSTANDING THESE missed targets, the fact remains that as far as the basic three yardsticks of prices, jobs and income, the news has been good.

But perhaps because we are simply not used to getting any good news, many among us are asking: Is this news about a strengthening economy too good to be true? Is it too good to last?

The first question is actually a legitimate one. Former National Economic and Development Authority (NEDA) chief Philip Medalla has pointed to glaring inconsistencies in the GNP/GDP growth data of recent years. One of these is the way personal consumption has been growing at five to six percent while average gross national income (GDP adjusted for the terms of trade, or our exports/imports price ratio) has been declining. Medalla declares playfully that these numbers suggest that we have either amazing consumers or amazing statistics — and he doesn’t hesitate to volunteer his judgment that it’s more likely the latter.

There are other major inconsistencies cited by other analysts, including the perceived “disconnect” between the macro-level statistics and data on people’s general welfare. The data have raised so many questions from the research community, in fact, that a high-level panel was commissioned several months ago by then NEDA chief Romulo Neri to review the Philippine Statistical System. All of this means that asking whether the good economic data are too good to be true cannot simply be dismissed as mere heckling by the political opposition.

But granting that the positive data we’re getting lately are indeed accurate, are we likely to be able to sustain or possibly even improve further on the good news? How is the economy likely to fare in 2008? To answer this question requires looking at the external factors (i.e. those beyond our control) and internal factors that will drive — or drag — our economy in the year ahead.

The external economic environment is not conducive to improved economic performance over the short term. A U.S. recession is widely expected to be in the offing, triggered by the ongoing crisis in the U.S. housing market and the sub-prime housing loans. And given how the United States remains the biggest buyer of most countries’ exports, the saying that “when the United States sneezes, everyone catches a cold” is likely to be played out.

Two other factors beyond Filipinos’ control loom large in the 2008 economic outlook: the continued weakening of the U.S. dollar, and rising oil prices. The sinking dollar continues to lead dollar-linked currencies into uncomfortably rapid appreciation, with the Philippine peso being no exception. Such appreciation tends to inhibit growth and employment not only in export industries but also in all domestic production sectors — as indeed it has already done in our economy and many others. Meanwhile, crude oil prices have already breached the $100 mark, and are expected to at least be in that neighborhood over the next year. This will again be growth-inhibiting, given petroleum’s prominent role as a direct and indirect input in almost all production activities.

Domestically, the factors to watch are tax collections, OFW remittances, and fixed investments. The boost in last year’s surprisingly high GDP growth beyond the more normal five to six percent was entirely attributable to high government spending and surging remittances. But unless tax collection performance finally breaks from past trends, it is hard to expect as much boost from the public spending stimulus as we had in 2007. How much longer the double-digit surge in remittances will last is hard to tell, but a slackening trend in deployment of workers overseas suggests more prudence in plotting the remittances outlook.

What could lead our economy to defy the general moderation in world economic growth, however, would be a dramatic reversal of the negative fixed investment sentiment that has plagued our economy in recent years. The government has so far fallen short in providing an attractive investment environment especially for domestic business, for which weak governance (translation: weak and inconsistent law enforcement to curb smuggling, corruption and regulatory capture, among other things) has constantly been cited as a key impediment.

The implication is clear: we can sustain the good news and possibly get on a new higher growth track, notwithstanding a generally pessimistic global outlook, if we — or rather, our leaders — do one thing right, which is not even about business or economics. And that is to fix everything that has been wrong with our country’s governance so we can inspire more investments, thereby boosting jobs, incomes, and ultimately, the general well-being of Filipinos.

Dr. Cielito Habito, a former socioeconomic planning secretary, is now an economics professor at the Ateneo de Manila University, where he is also the director of the Ateneo Center for Economic Research and Development He writes a regular column on the economy for the Philippine Daily Inquirer.