DOF disputes bank’s gloomy PHL forecast

Finance Undersecretary Gil S. Beltran on Wednesday disputed a report by Standard Chartered Bank claiming the government’s target of 7-percent to 8-percent growth in terms of the gross domestic product (GDP) was “ambitious.” He asserted that growth arises from new capital investment and increases in productive efficiency, and therefore “growth in GDP can thus potentially grow in double-digit rates.”

Beltran said GDP growth in itself is a factor that brings down the inflation rate, which the British-owned lender should have considered in crafting its report.

“The Standard Chartered report cited the lowering of the inflation target to 2 [-percent] from 4-percent inflation rate in 2015 as a constraint on Philippine growth. Lower inflation will entail the Bangko Sentral ng Pilipinas’s [BSP] tightening of liquidity and raising of interest rates, thus dampening investment,” Beltran said.

“The Standard Chartered researcher should have looked at recent data to find out the strong negative correlation between GDP growth and inflation. In 2012 and 2013, when GDP growth reached 6.8 percent and 7.2 percent, respectively, inflation [using GDP price deflator] dropped to 1.9 percent,” he noted.

Beltran explained that when GDP expands, the supply of goods available in the market also rises. The increase in supply allows the prices to go down and this, in turn, reduces interest rates.

“This is the reason why the lowering of the inflation target should not be seen as a negative factor for growth. The BSP’s moving from a regime of negative real interest rates to positive real interest rates is more sustainable in the long run; it avoids bubbles and maintains the growth of savings,” Beltran said.

Beltran said the slowdown in GDP expansion in the first quarter of 2014 was a “short-term phenomenon” and should not be seen as a trend.

“For instance, the manufacturing sector returned to double-digit growth level of 13 percent in the first quarter based on Missi survey. Also, robust investment growth continued to be sustained. In economic zones, investment is 27 percent up in the first half of 2014 and foreign direct investments [FDI] net flows is up 34.5 percent from January to May 2014,” Beltran said.

He said the Philippine economy has the capacity to grow faster than the 7.2-percent growth registered last year, with or without the boost from election spending.

He cited indicators pointing to the possibility of an even faster GDP expansion for 2014, such as the higher gross national savings in relation to gross domestic investment, and the surplus savings which averaged 3.3 percent of GDP, using the current account balance in the balance of payments as basis, in the last 10 years.

“Using the national-income accounts approach, the average excess saving for the last decade is 3.8 percent of GDP. Last year, it was 5.2 percent of GDP,” Beltran said.

“This implies that the Philippines has excess resources to spend to push the economic growth higher. If these savings surpluses were invested in productive activities, the economy would grow by the amount of new investments plus the real rate of return on investment,” he said.

Other indicators that suggest a higher GDP growth rate was the expected new capital investments this year, led by the government’s planned increases in capital outlay, most of which on infrastructure, from 3.1 percent of the GDP in 2013 to 3.6 percent of GDP (around P458.4 billion) this year, to another increase to 5.2 percent of GDP in 2015, then finally 6.4 percent of GDP in 2016.

“Regression analysis shows that national government infrastructure investment has a real GDP growth elasticity of 1.96 that implies that the economy will grow by almost twice the original amount of investment,” he said. –David Cagahastian, Manila Standard Today