Wednesday, October 18, 2006

RP's fundamentals are improving but fundamental problems linger

THE “fundamentals” are definitely right when we simply look at the Philippines’ external sector. That’s what the International Monetary Fund (IMF) wanted to see and it definitely got a beautiful picture. But those are not the only numbers out there that matter, and one needs to go deep into the “internal sector” to get the larger view of the forest. The IMF saw a few robust trees that it deemed enough to pronounce the health of the whole forest stable and nice.

Definitely it is pleasing to hear the IMF finally saying something positive about the Philippines after four decades that the country has been under its tutelage. For a long time, multilateral institutions including the World Bank, International Finance Corporation, and the Asian Development Bank, have had the habit of castigating Filipinos by announcing a lower growth forecast which time and again has been proven to be too conservative (Remember then Neda chief Solita Monsod’s quarrel with a visiting IMF team, where she said one cannot attain fiscal targets “on the backs of the Filipino people”—meaning, one can only obsess with numbers up to a point that does not hurt the ordinary folk so much). The IMF “experts” criticisms are usually couched in polite language yet the message sent is clear: that the Philippines is the same old laggard that it used to be in the last 20-30 years.

Not anymore. No one talks about the “boom-bust cycle” these days. The economy has moved up within the 5-6 percent, owing to the strength of the services sector and surprising recovery in both agriculture and industry. And recent trends in the external sector, the IMF’s favorite trees, are definitely encouraging.

From January to August this year, exports grew 17 percent, owing to the strength of electronics, garments, agricultural products, and minerals. Foreign direct investments have lately breached the billion-dollar mark. That’s loose change compared to China’s 60-billion dollar FDI figure but at least, the trend has been on the way up. The dollar flows from overseas workers remain in the double-digit rate. Dollar-wielding tourists have also been on the rise, numbering more than 1.4 million in the first half of the year. Dollar reserves have reached more than 4 months’ worth or imports. And national government debt has fallen to about 2 percent of the country’s gross domestic product, way down from 5.3 percent five years ago.

These are great indicators and we are happy about them but they hardly represent a totally, healthy and stable forest. In the last several years, capital formation—data that represent changes in the capital stock (buildings, machines, inventories) and how savings is used for investments—have been in the negative. Specifically, fixed capital measuring the value of construction, durable equipment, and breeding stocks and orchard has also been in the negative.

These figures simply mean that the 5-6 percent growth was achieved through the contributions of Filipino citizens through their personal consumption (no doubt significantly financed by remittances), and trade (imports and exports) in both merchandise and services (specifically cyberservices). Yes, that’s the glowing “external sector” but it doesn’t really say much about the general strength of the Philippine economy, especially if we view the Philippine’s performance within the context of the performance of the entire Asia-Pacific Region.

Several questions arise: first, why is it that despite the better growth figures, capital formation has not been rising? Does it mean the country’s entrepreneurs are not investing? That seems to be the conclusion one gets. It means entrepreneurs are still hesitant to buy machines, upgrade their factories, and build inventories on a scale that would show up in the country’s national income accounts. This looks like they don’t have long-term confidence in the economy.

And why not, when the government itself has not been investing in the country’s future? In 2006, the government has been operating on a reenacted budget, thus preventing it from raising expenditure on crucial economic and social infrastructure. Worse, whatever little public expenditure money the government possesses has been lying idle, either because of low absorptive capacity or plain bureaucratic inertia. President Arroyo announced a massive public expenditure program in the last State of the Nation Address for the “super regions” but there seems to have been less buzz about it since then. Government, it appears, has not really moved fast enough despite the urgency of the situation. Take note how the government has become silent on the matter after the announcement.

Or maybe it’s deliberate so the government could window-dress the country’s finances and mask its under-underachievement especially in tax. Why do we say this? It’s because in the last nine months, the government has failed to meet tax collection targets, and yet comes up with a deficit figure that’s 41 percent better than program. Somehow, in order to present a very good fiscal picture to the IMF and the credit-rating agencies, the government needs to tighten on spending. This tack seems to shoot two birds with one stone, i.e., present a good picture to the IMF et al, while giving officials generous elbow room for spending towards the end of the year. Of course, it is so tempting to suspect that the government is probably building a dam of people’s money so that it could release the floodgates just in time for the election season. Talk about “fiscal consolidation”!

These are the facts the IMF has failed to see. And we are concerned that the IMF praises could even serve as an incentive for the government to do less. Now, that’s the real tragedy because it even jeopardizes the long-term prospects of the economy.

No comments: