‘Economy’s efficiency making us resilient’

Improvements in the local economy’s efficiency and productivity have made the Philippines’s output growth more resilient to external and internal shocks, a senior official from the Bangko Sentral ng Pilipinas (BSP) said.

BSP Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo said the country’s improving efficiency and productive gains are indicators that the country’s potential capacity has come up, thus giving resiliency to the output expansion of the country.

“The source of this resiliency is that the potential capacity of the Philippine economy has gone up. It used to be 4 percent to 5 percent early this decade. In mid-2000, we saw that the potential capacity had gone up to 6 percent to 8 percent, and this is why we have a very good convergence of sustained economic growth, on one hand, and low and stable inflation, on the other hand,” Guinigundo said in a conference in Baguio City.

In particular, efficiency gains—which are measured through the incremental capital output ratio (Icor)—have been consistently improving from 1989. Data from the central bank showed that the Philippines had an Icor of 3.2 from 2010 to 2013. This was lower than the 4.2 Icor from 2002 to 2009, and also significantly lower than the 6.4 Icor from 1993 to 2001, and the 9.5 Icor from 1989 to 1992.

A declining Icor means less capital is needed to produce a certain unit of output.

“If it has been coming down, it means that it has become more efficient. And efficiency translates to higher potential capacity,” Guinigundo said.

On productive gains, meanwhile, the total factor productivity (TFP) of the economy has been rising in the previous decades. From 1988 to 1994, the TFP of the country was in a 0.2 range, and went up to a TFP of 1.1 to 1.3 from 1995 to 2001 and hit a TFP of 2 in 2002 and 2012.

A higher TFP translates to an improving productivity in the economy as it measures the human capital as investment capital productivity.

The BSP official also said the higher potential capacity of the economy has allowed the Philippines to grow robustly without overheating.

“If there is a case of overheating in the economy, the numbers would tell it all. You would have a high trajectory of economic growth but prices are catching up. In other words, inflation would be in the neighborhood of 5 percent, 6 percent or even 7 percent if there is a case of overheating,” Guinigundo said. “But in this case, we see that because potential capacity has gone up,” he added.

The Philippines posted a growth of 7.2 percent in 2013, registering one of the highest growth trajectories in the region. Last year the Philippines also hit a full-year inflation of 3 percent, hitting the lower end of the BSP’s target range.

The first-quarter gross domestic product (GDP) growth is set to be released by the Philippine Statistics Authority (PSA) this May. Latest inflation numbers, meanwhile, showed that the rise of commodities in March hit 3.9 percent, slightly lower than the previous month’s 4.1 percent.

The central bank targets inflation to fall between 3 percent and 5 percent this year, while the government’s target for output growth is between 6.5 percent and 7.5 percent for 2014. –Bianca Cuaresma, Businessmirror