The Philippines: Balancing act

A $1.66bn stimulus plan announced earlier this autumn is expected to stimulate domestic demand in the Philippines as effects from the ongoing global economic turbulence continue to impact the country’s economy. The programme is designed to make up for government underspending that many claim has led to lower-than-expected growth in the first half of 2011, but ensuring that the money is spent in a timely and efficient manner may be a challenge.

The bill does not represent additional outlays beyond the original 2011 budget but rather a realignment of funds that resulted from government underspending in the first half of the year. As such, some economists have argued that the package is not a true stimulus, although most agree it is necessary to boost the country’s economy in the face of continued global economic uncertainty.

Of the Ph72bn ($1.66bn) provided for, Ph38bn ($878m) will go to national government agencies, Ph7bn ($161m) to local government units, and Ph27bn ($624m) to government-owned and controlled corporations.

One focus will be improvements in infrastructure, which has been identified as a key area for development, with allocations including Ph5.5bn ($125m) for infrastructure projects under the Department of Public Works and Highways. Rail will also see a boost, as the Mass Rail Transit project on EDSA will receive Ph4.5bn ($10m) for improvements, and light rail transit will be upgraded with Ph1.87bn ($43m).

The need for public sector investment was recently reinforced by news that the economy grew slower than anticipated in third-quarter 2011. GDP rose by 3% year-on-year in the third quarter, undercutting forecasts of 4.1%. The factors for the underperformance were both domestic and international, including the effects of a lethargic global recovery, supply-chain disruptions from flooding in Thailand and a weather-related decline in the fisheries and agriculture sector.

The World Bank has revised growth expectations for 2011 from 5% to 4.2% in light of recent economic data. While the bank expects growth to pick up again in 2012, possibly reaching 4.8%, this figure was adjusted from an earlier estimate of 5.4%.

In its biannual report on East Asia and the Pacific, titled “Navigating Turbulence, Sustaining Growth”, the World Bank argued that the primary near-term difficulties for the Philippines, as with most of East Asia, are the uncertainties in the global economy and a decline in investment.

The report is relatively optimistic with regard to the country’s ability to overcome the former challenge, noting that the Philippines’ domestically-driven economy leaves it less dependent on earnings from foreign exports, which are expected to decrease as many developed countries see a slowdown. Moreover, remittance inflows from overseas foreign workers help to provide a cushion, propping up private consumption.

In addition, macroeconomic indicators are positive and leave room for counter-cyclical policies. The financial and corporate sectors, owing to conservative decisions and regulations in the wake of the Asian financial crisis of 1997-98, have avoided systematic weaknesses. Fiscal deficits are lower than expected, and year-to-date inflation is at a manageable 4.8%.

In this environment, the Philippines has both the incentive and the capacity for monetary and fiscal stimulus, but the country may face some limitations in exactly which monetary tools can be used. Indeed, the Central Bank announced at its December 1 meeting that it would keep its interest rate unchanged at 4.5% and would not be able to lower the rate due to concerns over inflation.

The government has already been encouraged to expand the October stimulus. The budget deficit for the period between January 2011 and September 2011 reached only Ph53bn ($1.2bn), compared with a Ph234bn ($5.3bn) target, and the stimulus only amounts to about half of the difference.

The World Bank, however, argues that Asian governments will need to balance short- and long-term growth, and that “stimulus alone will not be enough to address the likely prolonged weakness in the global economy”. The report states that “slow global growth presents an opportunity for East Asian governments to refocus on reforms that will enhance growth in the medium and long term,” including in the areas of infrastructure and social services.

The government’s justification for underspending in 2011 has been the need to review portions of its much-touted public-private partnerships (PPPs) in infrastructure, as part of President Benigno Aquino III’s anti-corruption drive. Still, with the recent awarding of the Daang Hari-South Luzon Expressway (SLEX) link road project to Ayala Corp, the Aquino administration’s first PPP, it is hoped that this momentum carries into 2012 and the year will see the awarding of additional infrastructure projects, including the significant North Luzon Expressway-SLEX interconnection.

Investment in infrastructure is necessary to bolster the confidence of local and international companies and investors, as the lack of adequate infrastructure is repeatedly cited as a major limiting factor for investment in the country. Balancing short-term stimulus with a sustainable long-term developmental vision may pave the way towards further economic resiliency in the years to come.