OF SUBSTANCE AND SPIRIT

It could have been conveniently ignored if the source was not the Philippines’ central monetary authority, the Bangko Sentral ng Pilipinas (BSP). But no less than the BSP itself in its latest November 2023 Monetary Policy Report projects the gross domestic product (GDP) outturn in 2023, 2024 and 2025 falling below the growth targets set by the Cabinet-level Development Budget Coordination Committee (DBCC). The BSP is a resource institution at the DBCC. 

Reading through the BSP report, we find it exceptionally balanced, albeit nuanced: “The country’s growth prospects remain intact for 2023 to 2025 despite global headwinds and tighter financial conditions. Projected GDP growth could settle below the DBCC target of six-seven percent for 2023 and 6.5-8 percent for 2024 and 2025.”

There is nothing new in this assessment, and this is not a discredit to the BSP. Those global headwinds have been discussed in both domestic and international forums especially in the semestral meetings of the International Monetary Fund (IMF) and the World Bank Group. While the IMF recently upgraded the growth prospects of China, it remains cautious of the new risks. The recent outbreak of the hostilities in Israel and the Gaza Strip could create the risk of the possible involvement of Lebanon, Jordan and Egypt. This much was conveyed by the IMF Managing Director Kristalina Georgieva before the APEC Leaders’ Summit in San Francisco just a few days ago. For her, the global economy is more shock prone and weaker because of low productivity.

Tighter financial conditions derive from the decision of many central banks around the globe to tackle inflation, the persistent scourge of recent years. Despite the supply-driven dynamics, central banks took the upper ground by jacking up their policy rates to prevent second round effects and ensure that inflation expectations remain moored. Higher interest rates discourage credit and business activities. The other side to it, of course, is that if central banks fail to arrest inflation, that would be growth-negative.

The Philippines’ growth prospects are intact in the sense that the BSP expects business activities to continue growing. This is like bringing the good news before the bad. It is good, and no one should doubt that, because positive growth creates jobs and jobs bring food to the table. The silver lining was courtesy of the third quarter GDP growth of 5.9 percent, overshadowing the disappointing 4.3 percent growth in the second quarter. At an average growth of 5.5 percent for the first three quarters of 2023, the Philippines performed better than most of our neighboring countries in Southeast Asia. 

This assertion is very significant. To some of our economic managers and economic analysts, monetary policy should not be harnessed because inflation today is supply-shocked. It’s no different from using inappropriate instrument to deal with a specific problem. But the BSP has been correct in tightening monetary policy because one, supply shocks did cause second-round effects in terms of higher wages and transport cost, among others; two, demand pressures did build up as indicated by the elevated readings on core inflation; and three, inflation expectations did de-anchor based on the periodic polls of forecasters and analysts, both individual and institutional. 

Notwithstanding these tightening moves resulting in higher market interest rates, the growth of both domestic credit and liquidity has remained in the positive territory, and economic growth, based on this three-quarter performance, remains intact. If there was anything that could have constrained lending, it must be the banks’ own tighter credit standards, as shown by the BSP’s regular polls of senior bank loan officers. 

And nuanced as it was, the bad news is that the country might miss the growth targets this year and the next two. That is not bad news; it’s a plain statement of a possible economic outcome. The BSP should instead be commended for its independent analysis of economic prospects. It could just have aligned itself with the DBCC pronouncement that has been emboldened by the 5.9 percent growth in the third quarter. But adhering to the current DBCC targets could be nothing but ambitious, or perhaps ill advised. They are unrealistically high.

For one, at a three-quarter average of 5.5 percent, the Philippines needs to grow by 7.2 percent in the last quarter of this year. While its prognosis represents an upgrade due to the higher growth footprint, the downside risks are just too dominant.

Output gap is expected to gradually decline because of the ultimate impact of policy rate adjustments on consumption and investments, drop in real income due to high inflation and fiscal consolidation and the expected global slowdown.

Private consumption may be restrained if inflation persists for the next two years and the BSP’s risk-adjusted forecasts support this possibility. Investments are not doing well based on gross capital formation slowing down significantly in the first three quarters of the year. How the Maharlika Investment Fund could lead to higher additional investment remains a mystery because its funds are coming from the public sector itself. Higher public spending may be served by the bigger budget for 2024 but if the revenue projections are based on very ambitious growth targets, we might be seeing a higher deficit that should be funded either by higher taxes or higher borrowings, both of which could ultimately impinge on economic momentum. Finally, total exports are weakening as total imports gained only minimally for the first three quarters of 2023. On the other hand, balance of payments data show goods imports dropping by more than 10 percent, and reflected in the nearly seven percent retreat in goods exports, also for the first nine months. 

Who was it who said that good models are not to be believed but are to be used? Having handled monetary policy at the BSP for decades, we know that BSP has good models, and while people may not believe them, BSP have been using these models well. They have good batting average in assessing both output and inflation, they make perfect sense and tell a coherent story.