Philippines pressed on long-term growth drags

A UK-based think tank has cut its 2014 economic growth forecast for the Philippines, citing the lack of jobs in the country even as reconstruction work seen providing some boost.

The Centre for Economics and Business Research (CEBR), in a report commissioned by the Institute of Chartered Accountants in England and Wales (ICAEW) titled “Economic Insight: South East Asia Quarterly briefing Q2 2014,” downgraded its gross domestic product (GDP) forecast for this year to 6.5% from the 6.8% it gave last March.

“The Philippines is facing some unemployment problems apart from the aftermath of Typhoon Haiyan (local name: Yolanda),” the report noted.

“Its close trading links with the US will stimulate trade to an extent, but unemployment will drag on its demand as well as keep investor sentiment lukewarm in the short term.”

The Philippine economy grew by an above-target 7.2% last year. It is targeting expansion of 6.5-7.5% this year.

Substantial reconstruction, CEBR said, is needed to repair damage caused by Haiyan.

At the same time, these activities will give economic activity a lift and could be a driver of growth.

Meanwhile, against the backdrop of a recent emerging markets sell-off across the region, potentially rising interest rates luring investors back to the developed world, and a slowdown in China, Southeast Asia is looking at a challenging year ahead, CEBR said.

“While least developed ASEAN economies still struggle with commodity dependence, countries just beyond that stage such as the Philippines and Indonesia are striving to make the transition to an advanced-economy mix of exports,” it noted, referring to the Association of Southeast Asian Nations.

Reforms, however, must be sustained to allow this progress from dependence on commodity exports to high-value manufacturing, said the think tank, particularly citing government-led investment in education and skills, and private-sector-led large-scale investment in production.

“Investment in education and skills is key to building a knowledge economy. While the Philippines and Indonesia have done well in providing basic education at the primary-to-secondary level, governments need to look at increasing education investments at the tertiary level, particularly in developing engineering and science skills in order to move up to higher tiers of production,” said Mark Billington, ICAEW’s regional director for South East Asia, in a statement attached to the report.

With investments in human capital in place, foreign direct investments are seen driving the development of high-value sectors in the region.

Charles Davis, ICAEW Economic Adviser and CEBR Director said: “Investment is not just about building plants and creating new capacity that way. It is just as necessary that foreign firms setting up new sectors in less-developed economies transfer knowledge and up skill workers so they can produce higher-value added goods and services.”

“In the long term, as these economies grow wealthier, foreign direct investments will increasingly be driven by consumption rather than production, as the large populations of South East Asia should provide increasing numbers of affluent consumers,” Mr. Davis added.

FOR THE LONG HAUL

The Philippines’ chief state planner said separately that sustaining momentum of gains achieved thus far and further broadening the country’s economic base are crucial for the Philippines in order to move towards a long-term higher growth trajectory.

Socioeconomic Planning Secretary Arsenio M. Balisacan said that over the past three years, the Philippines has realized substantial gains, particularly in terms of improving macroeconomic fundamentals and reforming institutions.

“The challenge for us is to deepen the growth process that we’ve been experiencing to ensure that the trajectory we’re in now is for the long haul… and there are many things that we need to continue doing and deepening to make sure that these are in for the long haul,” Mr. Balisacan said in an interview at the sidelines of the World Economic Forum on East Asia.

Mr. Balisacan said that over the past years, the country went into a boom-bust cycle and has been putting its economic house in order after years of neglect — especially on the fiscal, monetary, and external front — poor business climate hampered by poor institutions, and weak leadership.

“This government has exploited these lessons from the past to ensure this boom-bust cycle will not be repeated this time, and has done a great deal to address these fundamental constraints to growth,” Mr. Balisacan said.

“We now know that the most basic constraint to investment and growth is the quality of your infrastructure. We have huge backlogs in infrastructure. Roads, bridges, irrigation, flood control… and even as we have accelerated the spending for infrastructure development, the challenge moving forward is to keep up that high level of spending in infrastructure,” he added.

“There’s also that other type of capital, which is equally important: human capital. These two are very critical to achieving productivity and sustaining a high level of growth.”

Improving economic and political institutions and the ease of doing business in the country, added the planning chief, are likewise especially important, given the increasingly integrated global landscape.

“At the end of the day, it’s really all about competitiveness. The margins when economies are globally integrated are quite small, and if your neighbor is more competitive than you investments, will move there,” he explained.

“And this competitiveness issue is a low-lying fruit. It’s quite a difficult process that you need to address anyway,” he noted.

“Issues like registering or closing businesses, getting an environmental clearance, dealing with labor… these can be fixed.” –Bettina Faye V. Roc, Senior Reporter, Businessworld