The last year has been a challenging one for Duterte’s economic managers, who had to grapple with slower economic expansion, higher-than-expected inflation, weaker exports, and declining competitiveness, just to name a few. For the first time in eight years, lawmakers have also failed to pass the succeeding year’s budget on time, which will affect the government’s projects. Despite this, the outlook for 2019 remains generally more optimistic, with GDP growth expected to reach at least 6.7%, courtesy of a much-needed boost from the upcoming midterm elections. As the year draws to a close, we look at the trends that defined the economy in 2018, which will possibly shape 2019 as well.
The third quarter of 2018 saw the economy growing by a disappointing rate of 6.1%, the slowest since 2015, and which brings the average growth so far to 6.3%. The economy needs to grow by at least 7% in the final quarter of the year to reach the government’s low-end target of 6.5% for 2018.
Household consumption has been identified as among the culprit. Weaker household expenditure, the backbone of the economy, dragged overall economic performance to its weakest showing during the Duterte administration. On a more positive note, capital formation and government spending continued their double-digit expansion in 2018.
While services and industry continued to expand, agriculture is still underperforming. Worse, the sector’s poor performance has been constantly blamed for the surge in commodity prices. The government has acknowledged that the sector has been beleaguered by production issues in 2018 and will count as among Duterte’s top priorities for the remainder of his term.
Runway inflation was arguably the Duterte administration’s biggest stumbling block in 2018. In November, inflation eased by -0.7% to 6%, the first negative month on month growth for the year. This brings inflation to 5.2% for the first eleven months of 2018, exceeding central bank’s upper-end target of 4%, but on track with its revised full-year forecast of 5.2%.
Food items, especially rice, were the main inflation drivers for the year. The unreliable rice supply had been blamed on the shortcomings of the National Food Authority, which failed to import rice on time, and the overall rice policy. Duterte’s economic team has repeatedly called for a shift to rice tariffication to address lingering rice supply issues. The Senate has approved the measure on third and final reading in November, three months after the lower house approved its own version, and the bill will be up for deliberations in the bicameral conference next.
External factors such as higher global oil prices, alongside the weaker peso, also contributed to inflation. The higher excise taxes on some commodities have also pushed prices up, although the finance department insists that the TRAIN Law’s contribution to inflation was marginal at worst. To curb rising commodity prices, the central bank raised interest rates five times since May, bringing overnight borrowing rate to 4.75% from 3%. For 2019, the BSP is already expecting inflation to soften to 3.5%, slipping back to within its 2-4% target.
After a strong performance in 2017, exports contracted by 1.2% from January to October 2018. Electronic products, our main exports, continued to grow, but failed to offset the contractions in almost all other top commodities, such as other manufactured goods, machinery and transport equipment, ignition wiring set, other mineral products and coconut oil. Banana exports, however, increased by 17.5% for the first ten months of 2018, with increased receipts from China. Exporters attributed the contraction to both internal and external factors, such as higher costs of raw materials and production resulting from increased salaries, the US-China trade war, volatile global oil prices, a weaker peso, and the government’s tax reform program. Imports, on the other hand, continued its double-digit expansion at 16.8% for the first ten months of the year—amidst increased receipts of capital goods and raw materials and intermediate goods. Imports from China, our top source, grew by 26.5% during this period.
Foreign Direct Investments (FDI) increased by 24.4%, amounting to USD 8 billion for the first three quarters of the year. However, after six months of expansions from January to July (with a slight 3.2% dip in April), FDI saw double-digit contractions thereafter: by 41.2% in August and by 29.4% in September. FDI for the final quarter of 2018 needs to reach USD 1.2 billion for the BSP to reach its full-year target of USD 9.2 billion. The full-year target was already revised upwards from USD 8.2 billion, due to sustained developments in the local economy, improvement in global economic conditions in compared to 2017, and the implementation of previously awarded public-partnership projects. However, this figure is still lower than the USD 10 billion record-high inflows recorded in 2017. Within the region, the Philippines is only ahead of Malaysia in terms of FDI inflows in 2018.
FDI is still dominated by debt instruments, mostly intercompany borrowings or lending between foreign direct investors and their subsidiaries in the Philippines, which reached USD 5.5 billion for the first three quarters of 2018. Unsurprisingly, with Duterte’s overtures to China, Chinese investments increased by over 2,000%.
The government has also pursued measures to improve the overall economic environment. The Ease of Doing Business (EoDB) Act, signed into law last May 2018, seeks to streamline and improve the current systems and procedures in the government in order to reduce turnaround time, cut bureaucratic red tape, and eliminate corrupt practices by simplifying the issuance of permits and licenses. The IRR was scheduled for release last October 22, but the government has yet to organize the Anti-Red Tape Authority, the body authorized to release the IRR. President Duterte also signed the much-awaited 11th Foreign Investment Negative List (FINL) in October, which consists of investment areas or activities that are open to foreign investors and/or reserved to Filipino nationals. Under the latest list, 100% foreign ownership is now allowed in internet businesses, training centers, adjustment and lending companies and wellness centers. Foreigners are now also allowed to teach non-professional subjects in universities.
The positive positioning for an economically productive year lies in between regulation and non-regulation, in between state and market collaboration. The expansion of market forces can be facilitated directly by government policies. These policies, in effect, open the institutional and territorial levels of engagement where action-oriented responses to economic governance could be realized. Only with a consistent policy environment will big investments for job creating enterprises thrive.
In turn, market intervention or management in the implementation of government projects in infrastructure, manufacturing, public services and agriculture could surely facilitate implementation and ensure benefits to the target clientele.
Political and economic positioning—an independent foreign policy and relaxed and delegated economic management—are the keywords toward a more progressive new year.