The economy: Slow ride on the straight road

First of two parts

A HOPEFUL chorus from top government officials heralded the August 31 release of Philippine economic data. A week and a half before, Finance Undersecretary Gil Beltran put April-June real growth in gross domestic product at “slightly better than 4.9 percent [in the first quarter], because of higher government spending and power consumption was up. More or less 5 percent.”

Citing increases in public spending, foreign investment, overseas remittances, and outsourcing revenues, Deputy Governor Diwa Gunigundo of the Bangko Sentral ng Pilipinas (BSP) told the press: “These developments point to a better turnout in the output performance of the economy for the second quarter.”

Then, just days before its attached agency, the National Statistics Coordination Board (NSCB), published second-quarter GDP figures, the National Economic & Development Authority predicted 4.5 percent-5.5 percent expansion, “based on available data.” NEDA Director General Cayetano Paderanga credited robust agriculture output, offsetting weakness in industry and services.

In sum, DOF, BSP and NEDA expected that the economy was off to a fast ride on the Tuwid na Daan of President Benigno Aquino 3rd.

It wasn’t. The official NSCB media release put second-quarter growth at a sluggish 3.4 percent, down from 4.9 percent in the first quarter and “less than half the booming 8.9 percent” in the second quarter of 2010. And growth in gross national income (the new name of gross national product) fell to 1.9 percent, from 3.6 percent in the previous quarter and 8.2 percent for the full year of 2010.

For quarter-on-quarter growth, the April-June increase from the previous quarter’s output also slowed to less than 1 percent, down from the first quarter’s 1.9 percent increment over October-December 2010. To achieve the growth target of 7 percent -8 percent for the whole year, the economy would have to grow more than unprecedented 9.9 percent for the rest of 2011, says NSCB Secretary General Romulo Virola.

What dragged down the economy? NSCB’s press release cited “a high base erected by election related expenditures last year.” In fact, second-quarter consumer spending and non-infrastructure government spending —expenditures normally boosted by election spending—showed some growth over a year ago, rising 5.4 percent and 4.4 percent, respectively.

There was some dampening of export demand, but manufacturing, which is most affected by trade slowdown, still managed nearly 5 percent expansion. The real growth sapper, it turns out, was again government underspending, as it was in the first quarter. But this time, the state shortfall was in infrastructure outlays.

Adjusted for inflation, public works fell a staggering 51.2 percent from a year ago, despite the summer months, when the building of classrooms, roads, bridges, irrigation and flood control systems is supposed to accelerate before classes and rains begin in June.

The second quarter’s infrastructure spending of P34.2 billion was the lowest in any quarter since 2007. The plunge from P70.2 billion a year ago, looks even more precipitous considering that government construction in the first half of 2010 was itself held back by the election ban on new projects.

Public works had now fallen in every quarter compared with 2010 levels, since President Aquino took over. The second quarter decline was enough to offset gains in agriculture and services, up 7.1 percent and 5 percent, respectively, in the April-June period. Hamstrung by public infrastructure, the industry sector, which includes construction and accounts for nearly a third of GDP, stood still at -0.6 percent in real or inflation-adjusted terms.

The slump more than offset the 19 percent leap in private construction, slashing 16.1 percent off gross value added in the entire building sector. Accounting for nearly one-fifth of industry sector output, construction’s contraction cut industrial growth to zero despite modest expansion in manufacturing (up 4.8 percent) and in mining and quarrying (3 percent).

No wonder even a staunch administration ally like Senator Franklin Drilon criticized the underspending. “When the government underspends, the economy generates fewer jobs,” he told Senate media at the start of budget deliberations early last month. The senator lamented that the Department of Public Works and Highways had only spent 5 percent of its P20 billion in lump-sum allotments for the year.

Drilon also noted Budget Secretary Florencio Abad’s admission that the national government would need to spend more than P1 trillion in the second half of the year to catch up with programmed outlays. “It’s a very difficult task,” Drilon said. Especially with rains hampering construction from July to September, or even longer.

In her business column last week, former NEDA head Solita Monsod also deplored the huge shortfall in government spending: almost P140 billion off the January-June 2011 programmed spending of P838.6 billion, and some P90 billion short of the first-half spending last year. The Department of Finance (DOF) has been crowing about the budget deficit’s mammoth decline, but Monsod counters that the drop in red ink was due mainly to underspending, since first-semester revenue collections were P4.8 billion short of target.

In fact, the DOF’s presentation at its Congress budget hearing last month reported that revenues and taxes as a percent of GDP barely rose in July 2010-May 2011 compared with the same 11-month period a year before. But in the last two years of the Arroyo Administration, the revenue-GDP ratio jumped to 13.8 percent from 8.4 percent, and taxes-GDP hit 12.2 percent from 7.3 percent. Meanwhile, customs collections actually declined as a percentage of GDP, to 2.7 percent in July 2010-May 2011, from 2.9 percent a year before, contributing to the removal of Customs Commissioner Angelito Alvarez.

The government has often remarked that the spending slowdown, especially in big-ticket public works, is due to more careful and honest contracting. In his statement to media, Sen. Drilon acknowledged the integrity efforts, but “all of these measures and reforms being undertaken on the ground have taken their toll on the capacity of government to spend on infrastructure.” For her part, Monsod asks, if the spending decrease was really due to the discovery of corruption and misappropriation, “why hasn’t been there any mass firing of the incompetents and the corrupts?”

NSCB head Virola urges the Development Budget Coordinating Committee, which groups the heads of NEDA, DOF, BSP and the Budget Department, to consider lowering the economic growth target and launch programs to spur expansion. But DBCC members Cesar Purisima of DOF, Paderanga of NEDA, and Abad of Budget are working for a major upturn in the second semester.

In the concluding part of this article, we assess the economy’s chances of hitting the growth target and shifting into high gear on the Tuwid na Daan. –RICARDO SALUDO, Manila Times

(The last part will be published on Monday.)

Ricardo Saludo heads the Center for Strategy, Enterprise & Intelligence ( ric.saludo@censeisolutions.com), which publishes The CenSEI Report. For copies of the full study, please email report@censeisolutions.com.