Bad economic news

The Philippines does not owe any money from the International Monetary Fund.   In fact, it is the IMF that owes the Philippines money, $1 billion, which it promptly lent to the bankrupt banks and bankrupt countries of Europe.   So if there is anyone who should explain why its lending or borrowing practices are bad, it is more the IMF, rather than the Philippines.

Still, every year an IMF team comes to Manila to check on how the government is managing the government and how the economy is managing itself.   That team came in August this year.   On Aug. 26, 2015, the IMF reported on its findings about the Philippines.

At first blush, the IMF report, summarized in a 769-word press release, sounds positive. 

“The outlook for the Philippine economy remains favorable despite uneven and generally weaker global growth prospects. Real GDP is projected to grow by 6.2  percent in  2015, as lower commodity prices lift household consumption and improved budget execution raises public spending,” the Fund said.

“Lower fuel prices, partly offset by somewhat higher food prices due to assumed moderate El Niño conditions, should help keep inflation in the bottom half of the Bangko Sentral’s target band. The current account surplus is expected to rise in  2015 due to lower oil prices and continued inflows from business process outsourcing and remittances. Fiscal policy is expected to remain prudent,” the Fund added.

The IMF report seems to me bad news. This is given the recent economic and financial turmoil in China and its reverberation around the world (what the IMF calls “external headwinds”), and given the incompetence of the Aquino administration in handling taxpayers’ money to:

—finance badly needed infrastructure to boost investment;

—mitigate the daily suffering of Filipinos, especially those in Metro Manila and nearby provinces, in commuting from their homes to their workplace and back; and

—help the poor in a more meaningful way than politically motivated cash dole. 

An average city worker spends three hours going to work, one way, and another three hours, coming home—that is assuming the weather is good, MMDA traffic mulcters are doing their job, and the so-called Highway Patrol Group, another notorious group, would really deliver their promised miracle to sort out metro traffic.

IMF’s 6.2-percent economic growth projection for 2015 is lower than previous estimates—of an earlier 6.7 percent by IMF itself, 6.5 percent by the World Bank, 6.4 percent by the Manila-based Asian Development Bank, and by the administration’s own 7.5 to 8 percent projections.

If the BS Aquino administration is not careful, the Philippine economy could slow down to 6 or 6.1 percent growth this year—the slowest in four years, since the 3.7 GDP growth slump in 2011, the first full year of the administration, from 7.6 percent in 2010, the last year of the much-maligned Arroyo administration.

“Risks to the outlook are tilted to the downside,” frets the IMF in its updated report dated September 2015.

The Fund remains gung-ho on the administration, however. “The Philippine authorities are well equipped to respond as needed with suitable policies should any risks materialize, particularly given the strong fundamentals and ample policy space,” it adds rather condescendingly.

The so-called strong fundamentals refer to nothing more than strong consumer spending boosted by $25 billion OFW remittances per year, equivalent to P1.115 trillion—enough to bankroll the payroll of two million largely unproductive and often corrupt government personnel, twice over, in a year.   So it is not true that OFW remittances do not benefit the government.

OFW remittances are one reason why the economy keeps growing, at above 5-6 percent per year, despite all the external turmoil.     Household consumption is now 71 percent of GDP or economic output.     If consumers spent less, which is unlikely, economic growth would collapse.

What the IMF refers to “ample policy space” seems to refer to the practice of the Bangko Sentral to intervene in the peso-dollar rate, and its proclivity to tighten credit flow whenever it pleases the IMF.   IMF calls this “vigilance”—“if inflation or credit growth were to accelerate with signs of potential overheating”.   IMF’s code word for higher interest rate or tightening credit to certain sectors (like real estate) is: “strengthen resilience.”

Translation: Interest rates will rise. Loans to real estate and construction will probably slow down.

As to the peso-dollar rate, the IMF wants “continued exchange rate flexibility”.     Translation:   The peso will go down some more against the US dollar, probably, to nearer to, or lower than, its end-2008 rate of P47.48 per dollar.  The peso has already depreciated, by 5.16 percent, from end-2014 rate of P44.617 to yesterday’s P46.9235.

The IMF is aghast that the Aquino administration does not know how to spend money, already budgeted.

Thus, the IMF directors, says their press release, “also encouraged further efforts to strengthen public financial management and budget execution, and to mobilize revenue to meet the large social and infrastructure needs.”

   Translation: Government must spend more for infra, steal less for politics, and not give away any more tax incentives. This might explain the attempt to increase (which thankfully was aborted) the value added tax (VAT) to 15 percent, from 12 percent at present, and the failure of Congress to lower corporate and individual income tax rates (which at 32 percent is among the highest in the world).

From 2011 to 2014, according to former Budget Secretary Benjamin Diokno, the Aquino administration failed to spend P529 billion of budgeted expenditures. The economist calls this failure “mind-boggling” and “epic incompetence.”

Says the IMF’s latest report on the Philippines:

Boosting the level of investment is a major structural challenge.

“Public and private investment rates in the Philippines are well below regional peers, as reflected in its low capital stock and infrastructure quality. The main impediments to private investment are inadequate infrastructure, a weak investment climate, and restrictions on foreign direct investment. Immediate priorities include implementation of the transport system in Manila [Manila Dream Plan approved by Neda] and improvements in airports, road connectivity, and seaports across the country.”

So if you cannot get a ride home, blame Aquino.   By the way, the El Niño will be worse.   It means a shortage of at least 500,000 tons of rice.


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