Reconstruction, weak peso among PHL economic drivers in 2014

Reconstruction activities covering the destruction caused by Typhoon Yolanda in Central Philippines and strong consumer spending on the back of remittances and the boom in business process outsourcing (BPO) sector will fuel the Philippine economy to keep growing in 2014.

While 2013 was arguably a stellar year for what was previously tagged as the “Sick Man of Asia,” the year was punctuated by external headwinds blowing in the form of the US Federal Reserve tapering and the budget crisis, plus the conflict in Syria, that spooked foreign funds to flee from emerging markets, including the Philippines.

The domestic front was also marred by gut-wrenching natural calamities: a 7.2-magnitude earthquake and the killer Typhoon Yolanda. The disasters raised concerns over the economy as economic managers noted the impact of Yolanda alone could shed a percentage point from the gross domestic product (GDP).

However, a sense of optimism seems to prevail particularly among market participants.

“These problems are temporary… we will see light at first quarter of 2014,” Harry Liu, president of Summit Securities Inc.

While the impact of Yolanda, which hit Central Philippines on Nov. 8, drove some economists and financial institutions to lower growth expectations for the Philippines, they also expected the long-term effects to actually bode well in terms of economic expansion.

In an e-mailed research note, financial services group and global investment bank Nomura said the typhoon’s impact “does not change the fundamentally strong macro picture that is making the country a regional standout…

“We think the recovery will be relatively quick, starting early next year,” Nomura said, noting GDP growth was strong in the aftermath of the massive floods brought by Tropical Storm Ondoy that hit Metro Manila in September 2009.

On Dec. 18, the National Economic and Development Authority (NEDA) said rebuilding typhoon-hit Visayas will cost P361 billion, which will be disbursed over four years under the Reconstruction Assistance on Yolanda (RAY) Plan until 2017.

The cost will cover P183.3 billion in housing and resettlement, P28.4 billion in rebuilding public infrastructure, P37.4 billion in financing education and health services, P18.7 billion for agriculture, P70.6 billion for industry and services, P4 billion for local government, and P18.4 billion for social protection.

Of the total, NEDA director general Arsenio Balisacan said the government has already allocated about P34 billion for the critical immediate actions and will release another P100 billion in 2014.

PPP projects

Apart from reconstruction activities, more infrastructure projects in the pipeline and under the government’s flagship public-private partnership (PPP) program are underway next year that would serve to jump-start more investments.

“The administration’s main thrust is infrastructure spending which is seen to be the catalyst for the development of other industries such as manufacturing and tourism,” Jonathan Ravelas, BDO Unibank’s chief market strategist said in a separate research note, “2014-The year ahead: Philippines Shining Through,” e-mailed to GMA News Online.

The PPP Center earlier said the Aquino administration wants to cap its term with 15 contracts awarded under the PPP program.

Seven infrastructure projects have already been awarded since the start of the program in 2010, and multilateral organizations such as the World Bank and Asian Development Bank recognized the Philippines’ PPP process as one of the fastest in the world.

However, other government infrastructure projects could hit a snag as a scam involving the Priority Development Assistance Fund (PDAF), or pork barrel, was expected to stem the flow of money to legitimate programs.

On Nov. 19, the Supreme Court struck down as unconstitutional the PDAF after petitioners challenged its constitutionality in light of the P10-billion pork barrel scam supposedly masterminded by trader Janet Lim-Napoles in collusion with some lawmakers.

“Projects and disbursements of funds could be scrutinized more before any approval is made and may cause a slowdown in public investments,” Ravelas said.

And the financial markets still face serious liquidity problems as the Fed starts to taper its massive bond purchases next year.

“In the first quarter of 2014, we still expect volatility because of taper talks,” said Juanis Barredo, COL Financial Group Inc. vice president and head of customer service and sales.

On Dec. 18, the Fed announced it would reduce by $10 billion its $85 billion stimulus program starting January 2014.

Volatility hit global financial markets starting in May 2013 when Fed chairman Ben Bernanke told US Congress the central bank would start cutting back the stimulus program as the world’s largest economy recovers.

“There is better certainty about taper… the taper being announced and how it was announced suggest it’s going to be a gradual Fed taper,” Philippine Stock Exchange (PSE) president and CEO Hans Sicat told GMA News Online on Friday.

“If you believe in the fundamental economic story, the branded consumer… while inflation is low… there is a fiscal surplus… all these…will drive the economy in 2014… By and large that is still a correct call,” Sicat told reporters in a separate interview.

On the last trading day of 2013, the benchmark PSEi managed to eke out a slight gain and closed at 5,889.83. Compared with the close of 5,812.73 during the last trading day of 2012, it was a 1.3 percent gain, and arguably a loss considering that in 2013 the PSEi carved 31 all-time highs and was 26.13 percent higher in year-to-date terms when it closed on May 15.

‘Wrong impression’

The peso, meanwhile, capped 2013 slightly stronger against the dollar at P44.395:$1. But, as in the case of the stock market, this was weaker than the P41.05:$1 close on December 28, 2012.

The Philippine peso is expected to weaken further against the dollar on the heels of economic strides in the US, but robust remittance inflows and growth of the BPO sector will cushion the local currency from the onslaught of the rising dollar.

“Yes, the peso will weaken but it’s actually a wrong impression that it will be bad for the economy as higher exchange rate will give families of OFWs more to spend and afford more and BPOs to be more competitive,” said Victor Abola, professor of economics at the University of Asia and the Pacific.

“It will be difficult for the peso to bounce back against the dollar in 2014…” the economist noted. “There will be instances… it will strengthen… if foreign funds go back to the Philippines in the form of portfolio investments or in the form of actual investments,” he added.

In the end, there is no doubt… “the Philippines depends on… remittances and BPO sector to stimulate the economy,” Abola said. – VS/KG, GMA News