OF SUBSTANCE AND SPIRIT
As we wrote this piece, the election in the US was likened into a woman in travail, laboring in child birth. In a few hours, the world will know whether it’s a Donald or a Kamala. The market believes it could be problematic if the US pivots back to narrow economic nationalism which involves bringing goods and services production back to the United States, or putting up barriers to immigration. Yet, CNN’s initial exit polls indicate that only about a third of voters thought the economy is in good or excellent shape, down from about half who said the same in 2020. This is not good for Kamala. This seems to confirm Donald’s claim throughout the campaign that the Americans are not getting a fair deal.
True, if the IMF’s World Economic Outlook for October 2024 is to be a lead, the projected US growth was actually revised up to 2.8 percent from July’s forecast of 2.6 percent this year. But some emerging risks could be higher. For instance, US inflation is expected to persist and keep the US Fed cautious with its easing mode. Indeed, it is about to hold its monetary policy meeting this week and the bet is on a controlled easing if not an altogether steady stance. Interest rate expectations could remain elevated and the US dollar firm. These are not actually growth-positive.
Funding-wise, if the US Fed decides to be more cautious — perhaps in anticipation of the potential fallout from the election — emerging markets’ ability to borrow and service their loans in the US capital markets may be at risk. As Fitch Ratings recently reported, the Philippines is among a few sovereigns who issued foreign-currency debt in the third quarter. The country’s external debt is now at an all-time high of $130.2 billion.
For emerging markets like the Philippines, monetary policy could be most appropriate, measured as necessary, but they could also be driven by geopolitical factors like the US election’s collateral impact on their trade, migration and macroeconomic policy. Beyond these, there are pressing domestic issues that could downgrade their growth prospects.
In this country, climate change is causing devastation to both agriculture and industry. The Department of Agriculture recently estimated that El Niño and the series of typhoons and tropical storms reduced palay supply by more than one million metric tons (MT) for the last 10 months of 2024. Historical losses averaged only 500-600,000 MT. In terms of milled rice, it means we need to import an additional 670,000 MT. If imports foul up, inflation could definitely run up and weaken personal consumption and therefore growth.
These weather shocks also underpin the deceleration in manufacturing activity in October. The country’s purchasing managers’ index (PMI) fell from 53.7 to 52.9, still showing an expansion but at a slower rate. A lower reading indicates lower increase in new business orders and output. Although the highest in the ASEAN, the Philippines’ PMI reflects some slight deterioration in any of the following: new orders, output, employment, suppliers’ delivery times and stocks of purchases.
The other risk is fiscal space. National government (NG) cash operations continue to bleed with a deficit reaching ₱970 billion for the first three quarters of the year which could tip at between five to six percent of GDP. With taxation relegated to the backburner, NG has ramped up public debt now at ₱15.9 trillion, about three years of the country’s annual budget. For debt servicing, NG spent ₱751 billion last year, and for the first eight months of 2024, ₱915 billion or around 15 percent of the annual budget.
If the Supreme Court decides to invalidate the Department of Finance’s directive to turn over PhilHealth’s “idle, unused and excess funds” that means NG would have less ₱89.9 billion from its funding side, unless this is matched by a higher borrowing. This is hardly growth-positive.
With poor allocation of the budget — pork barrel, intelligence and confidential funds, and weak monitoring of flood control projects, and all that — we doubt whether the basic issues of human capital development and infrastructure could be given sufficient support.
Human capital is developed when we spend enough for education and health, and when we spend more for innovation through higher levels of research and development. Our own National Innovation Council, in charge of formulating the development of the National Innovation Agenda and Strategy Document or NIASD, is just beginning. The secretariat housed in NEDA has little institutional character and funding. No government can overemphasize enough the enormous value added of education, training, skills set, innovation and digital transformation in elevating and maintaining both the growth momentum and the quality of growth.
Infrastructure, on the other hand, as represented by the government’s 13 flagship projects aimed at establishing physical connectivity, water resources, digital connectivity and health, has barely taken off the ground. As of March 2024, only two have been completed. The government should assure the civil society of the higher likelihood of the other 11 being completed this year even as the August 2024 infrastructure spending actually declined by 11 percent. To be sure, good and quality infrastructure increases the sustainability of growth. Whatever shortfall in domestic investment can be very well complemented by foreign investment which would not need additional incentive to come and invest in the Philippines. With good infra backbone and people, we have what it takes to host successful business ventures.
Already, some observers of the Philippine growth story have begun to forecast lower growth for the country. For instance, the Fund at the conclusion of the 2024 Article IV consultation announced forecast below-target growth rates of 5.8 percent and 6.1 percent for 2024 and 2025, respectively, on account of the expected slowdown in major economies and potential increases in commodity prices. The Fund, however, places some confidence that if properly harnessed, the country’s abundant natural resources, untapped blue economy and its demographic advantage could by all means secure for the Philippines a more vigorous, more resilient economy.
Moody’s Analytics broadly shares this view in its assessment of the growth prospect for the third quarter of 5.7 percent. It is not too sanguine about the impact of the BSP’s rate cuts because of the lag time, while exports may “lose some shine” due to soft external demand and slowdown in world tourist arrivals.
While the issue between Donald and Kamala could be existential for some countries, our hands are quite full with household problems and challenges. Good governance could not be more pressing than now