Economic “Drivers and Spoilers” of 2018

Dindo Manhit, President of the Stratbase ADR Institute

The economic momentum has slowed down in the third quarter of 2018. But the economic managers are hopeful that the resilience of the Philippine economy in 2018 will likely continue over the medium term. As a result of the underperformance of the agriculture and unprecedented increase in inflation, weaker exports and declining competitiveness have become the spoilers of growth.

The third quarter growth rate at 6.1% was the slowest since 2015. This brought the average growth rate to 6.3%. To reach the government’s low-end target of 6.5% for 2018, they are hoping of that the economy grew by 7% in the last quarter.

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 and the government’s tax reform program. Imports, on the other hand, expanded at 16.8% for the first ten months of the 2018—amidst increased receipts of capital goods and raw materials and intermediate goods.

Foreign Direct Investment has so far been the biggest contributor to growth, having grown by more than 24% in the first three quarters of 2018, higher than the 6.9% growth rate for the same period in 2017.

While the government remains optimistic that the country will reach at least 6.7% in 2019 because of the midterm elections on May, an international credit rating agency and some multilateral lending institutions have downgraded their Philippine growth forecasts for 2018 and 2019. World Bank trimmed its growth projections to 6.4% in 2018 from 6.5% and to 6.5% in 2019 from 6.7%. Fitch Solutions on the other hand lowered their forecast for gross domestic product growth to 6.2% for 2018 and 6.1% in 2019 from 6.3% previously. Asian Development Bank revised its initial expectations from 6.8% in 2018 to 6.4% and 6.7 percent from 6.9% in 2019.

The economic managers’ optimism is anchored on the legislative reforms that they have been pushing and the positive development in the global oil market. The passage of the Rice Tariffication Bill in Congress, enactment of the Ease of Doing Business Act in May and the approval of the 11th Foreign Investment Negative List (FINL) in October are crucial reforms that can bring back the economy on track. Rice Tariffication measure is expected to reduce rice prices by up to PhP7.00 per kilo. The Ease of Doing Business Act and the signing of the President of the 11th Foreign Investment Negative List are expected to improve investor confidence and business environment.

The economic slowdown in 2018 has been a wake-up call for the Duterte administration. It further challenges our economic managers, business sector and policy makers that our booming economy requires constant boosts in productivity. Moreover, there is a need to urgently address the structural weaknesses of the economy which have hampered the sustainability of growth and productivity. These include low agricultural productivity, weak export growth, and undiversified export base.

The World Bank has recommended that the Philippines need to focus on three areas of reforms: improving market competition through regulatory reforms, simplifying regulations for trade and investments and reducing labor market rigidities and costs.

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.

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