SPECIAL REPORT: Fall of economic pillar shatters complacency

(Last part)
 
THE Philippines’ disappointing first-quarter economic performance has shattered the official consensus about the country’s supposed resilience amid the worst financial crisis since the 1930s Great Depression.Before the shocking admission that it was “teetering into recession,” the country’s economic managers were unanimous in saying four things.

First, that the export sector’s share to total output has fallen to a third from nearly half in 2000; second, robust remittances would continue to fuel domestic consumer spending; third, easing inflation would encourage Filipinos to spend more; and fourth, double-digit bank lending growth and ample liquidity would provide the resources to fund economic activity.

On May 28, all of those assurances were in doubt. According to the National Statistical Coordination Board (NSCB), the country’s gross domestic product (GDP) barely grew at 0.4 percent, sharply lower than last year’s 3.9 percent and the fourth quarter’s 4.6-percent expansion, and way below the government’s forecast range of 1.8 percent and 2.8 percent.

An indicator of economic performance, GDP measures the amount of goods and services produced in a country.

Consumer spending weakest since Marcos’ final year

Dragging down overall growth was the consumer sector, heretofore the main driver of Philippine economic expansion. In the first quarter, personal consumption expenditure (PCE) hardly grew at 0.8 percent, sharply down from the 5.1 percent last year and the 4.5-percent increase in the fourth quarter.

This was its weakest performance since the last full year of President Ferdinand Marcos in office, when consumer spending contracted.

Accounting for over half of the consumer basket, food spending in the first-quarter this year inched up 2.8 percent, or lower than last year’s 5.4 percent. Other categories that registered equally minimal growth were fuel, light and water; household furnishings; household operations; transport and communications; and miscellaneous items.

Household spending on beverages, tobacco and clothing however contracted by double-digits this year.

The foremost question in the minds of many analysts was, where was the insuppressibly mall-loving Filipino?

Agost Benard, Standard & Poor’s (S&P) analyst, said the weakness in consumption was a surprise in the first quarter, given that remittance inflows were still growing.

Money sent home by Filipinos overseas rose 2.7 percent year-on-year while the number of workers deployed offshore jumped 27.3 percent during the first quarter.

“As remittances normally act as a key support for sustaining local consumption, the low domestic consumption figures against still-growing remittances imply that more of the inflows are saved,” Benard said.

Rates at pre-Asian crisis lows

Partly to blame for the official smugness, the Bangko Sentral ng Pilipinas (BSP), up until April, was very confident about the supposed resilience of domestic consumer spending.

In a statement responding to an International Monetary Fund (IMF) forecast of flat growth this year, the central bank said, “Personal consumption, which accounts for more than two-thirds of the Philippine economy, has been historically firm, with private spending resilient across business cycles.”

Moreover, “[s]tructural factors are behind this underlying resilience. The Philippines’ young and economically active population has propelled economic growth even in difficult times. Incomes are also at a level where the majority of the population has a high propensity to consume,” the BSP said.

“Importantly, the recent easing of inflation should provide a welcome boost to household purchasing power,” it added.

After the first-quarter GDP results were announced, the BSP was more than its usual parsimonious self when it explaining the disappointing numbers.

In a statement released after the economic numbers were announced, monetary authorities said, “The [Monetary] Board also noted [emphasis added-Ed.] the lower-than-expected GDP growth of 0.4 percent for the first quarter of 2009. In this connection, the decision to lower policy rates could provide additional boost to spending and investment in the economy and support market confidence.”

The BSP also promptly cut its interest rates by another 25 basis points, its fifth reduction since December last year. This brought the overnight borrowing and lending rates to pre-Asian crisis lows of 4.25 percent and 6.25 percent, respectively.

“Any chance of a shift to a neutral monetary position is small, at least until the end of the year, especially given still-moderate credit growth and falling inflation,” Benard of S&P, said.

The IMF has since cut further its Philippine forecast to a contraction of 1 percent.

Monetary, fiscal authorities point fingers

But BSP officials have insisted that monetary easing alone cannot prevent the economy from a free-fall.

A reduction in the BSP’s policy rates normally sends interest rates on bank products such as housing and auto loans and credit card receivables lower. Monetary easing therefore is aimed at encouraging greater bank lending.

Monetary authorities have been egging on their fiscal counterparts to crank up state spending, similar to what other countries are doing in the current crisis. The first-quarter GDP data brought the policy debate out in the open.

A few days after the release of the first-quarter GDP numbers, BSP Deputy Governor Diwa Guinigundo said the government should review its cash position to determine if local government units (LGUs) and other agencies were spending their budget allocations.

“Was the 16-percent increase in disbursements over year ago levels really translated into actual spending? In short, we need to ensure at this point that the additional budgetary allocation was actually spent,” he said.

While addressing reporters’ queries, the BSP official was responding to fiscal authorities’ intransigence.

Socioeconomic Planning Secretary Ralph Recto, for one, had said the government can’t just throw money to address an economic slowdown.

But Guinigundo said, “Nobody ever suggested that we just throw money into the economy to ensure that we avoid a recession.”

“While I said that the very act of spending already sent out a good signal to the market, this by no means suggests we can go ahead and spend on anything and everything. In the first place, [d]id we really spend on those projects as originally scheduled and programmed?” he added.

The data however can’t lie. In the first quarter, public expenditures as a share of GDP grew 3.8 percent, but was slower than the 4.7-percent year-on-year expansion in the fourth quarter of 2008.

So while the President promised to frontload expenditures in the early part of 2009, actual state spending decelerated.

Treasury fails to secure enough money

Behind the reluctance to spend more was the government’s weak revenue collection to date, with end-April figures slipping 6.3 percent to P351.9 billion from last year’s P375.5 billion.

The Bureau of Internal Revenue (BIR), which accounted for about 80 percent of tax revenues, collected P241.8 billion, or 6.2-percent lower than last year, while the Bureau of Customs generated P64.7 billion, or 8.3-percent down.

Consequently, the four-month fiscal gap widened to P111.8 billion, or more than half the full-year program.

Citigroup said the Philippines is likely to incur a budget deficit of P400 billion, or 5.3 percent of GDP this year, if the tax-to-GDP ratio slides to 12 percent.

“Raising this ratio to the range of 12 percent to 13 percent this year, still below the tax ratio trend, and without the benefit of new measures, [is] still deemed a sanguine fiscal scenario,” the US financial giant said.

It said the Philippines’ GDP growth projection of 0.8 percent to 1.8 percent does not reflect a good tax effort. The tax to GDP ratio reached 11.5 percent in the first quarter.

While financial markets had suspected all along that the original deficit ceiling was unrealistic, the official revision of the country’s fiscal program gave investors an excuse to demand a higher rate in exchange for lending to the government.

As a result, the Bureau of Treasury since the beginning of June failed to secure enough money through the sale of T-bills and T-bonds during the weekly auction of these debt papers or IOUs.

Since the start of the month, the yield on the 91-day T-bill, which banks use in pricing their loans, jumped by more than 18 basis points to 4.494 percent during the last auction on June 15. The government, however, failed to borrow on six-months and one-year notice after investors demanded higher rates.

“There’s a lot of speculation in the market because of the government’s announcement of the [higher] deficit,” National Treasurer Roberto Tan said after the latest auction.

“Expectations are not rational right now because of initial reactions on the deficit announcement, and there are a lot of speculation without really knowing our strategy and our plan for the year,” he said.

A few days after that failed auction, Finance Undersecretary Gil Beltran unveiled the government’s plan for the year. It would tap the Japanese debt market by issuing from $500 to $1.4 billion in so-called Samurai bonds.

The Philippines last tapped that market in 2000, when the government raised $320 million from the sale of five-year debt papers that offered a 3.2-percent coupon rate.

On Wednesday, the President and her economic team left for Tokyo to negotiate with Japanese counterparts to support this borrowing plan.

Downgrade in credit rating

Despite this new borrowing tack, Beltran admitted that the government is hard-pressed to borrow more after the downward revision in the country’s economic growth target led to a higher debt-to-GDP ratio.

With the lower growth target, the country’s debt-to-GDP ratio now stood at 57.6 percent from an earlier program of 55.7 percent. Last year, this ratio stood at 56.3 percent.

“The Samurai takes pressure off [fixed rate Treasury notes] and [dollar-denominated Republic of the Philippines bond] prices from the blow out in the fiscal deficit,” ING Bank said.

In a research note, the Dutch financial firm said overshooting the deficit program however risks a downgrade in the Philippines’ credit rating.

“We think there will be further upward revisions to the deficit target and that the likelihood of a negative rating action has gone up,” it said.

ING’s warning came on the heels of S&P’s admission that a downgrade loomed if the Philippines’ budget deficit widened due to weak revenues or stalled tax reforms, or if spending controls snuffed out the country’s long-term growth prospects.

“The ratings could be lowered if stalling reforms or weakening revenue effort lead to higher fiscal deficits, or if budget goals can only be met through reigning in spending at the expense of future growth prospects,” Benard of S&P, said.

He said the country’s main weakness in its ratings is high public-sector debt stemming from a narrow tax base and inefficient public enterprises.

S&P’s sovereign rating for the country stands at “BB-,” which is below investment grade, thus raising the Philippines’ cost of borrowing abroad. S&P maintains a stable outlook, which means that it is likely to maintain its current rating in the next six months to a year.

A lower credit score therefore would further raise the country’s interest payments, risking a return to the debt debacle of more than two decades ago. — With Reports From Maricel E. Burgonio And Lailany P. Gomez, Manila Times