MANILA, Philippines — The Philippine economy found itself fishing in choppy waters in 2022, as external headwinds muddied its recovery from the pandemic.
As it is, the domestic economy is set to end the year with stellar growth figures. This was anchored mainly by consumer spending as Filipinos went out in droves as pandemic restrictions were relaxed.
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Gross domestic product in 2022 is widely expected to fall within the Marcos Jr. administration’s target of 6.5-7.5%. The economy grew 7.6% year-on-year in the third quarter, surprising analysts since inflation kept accelerating.
For Jun Neri, lead economist at the Bank of the Philippine Islands, this growth could have been more inclusive.
“While faster than most analysts' expectations, the 2022 growth recovery turned out to be a lot less inclusive than we had expected owing to a 14-year high inflation rate,” he said in a Viber message.
Domini Velasquez, chief economist at China Banking Corp, opined that the 2022 GDP was still wanting.
“This is welcome news after two years living with uncertainty. However, economic growth remains largely driven by the reopening momentum,” she said in a Viber message.
On the other hand, Leonardo Lanzona, an economist at Ateneo De Manila University, deemed the domestic economy’s performance a “failure” considering that the GDP was boosted by base effects. The economy was still grappling with pandemic hurdles in 2021, as restrictions kept consumers largely at home.
“As we now face the new year, we are confronted with huge supply side constraints because there was no structural response during the time when credit was more available and the rest of world was gearing up to face the post-pandemic challenges,” Lanzona said.
Looking under the hood, the Philippine economy sputtered its way to close out an otherwise chaotic year.
Inflation’s high
Inflation is projected to peak in December. The Bangko Sentral ng Pilipinas made the forecast after its rate-setting meeting this month, as inflation hit a near 14-year high of 8% in November. Even the Asian Development Bank believes inflation in the country will “peak soon.”
For Neri, economic growth with rising inflation in the background left the country’s poorest by the wayside.
“Growth could have been more inclusive had some policy mistakes been avoided,” Neri added.
Russia’s invasion of Ukraine unraveled commodity and energy prices everywhere. The shockwaves from the geopolitical fallout came at an inflection point for the global economy, as most countries looked to bounce back from pandemic misery.
The impact left emerging markets, like the Philippines, reeling. The country depends on imported fuel, leaving it vulnerable to price swings. Local pump prices continue to hover at near-unaffordable levels for many consumers.
“High inflation cannot solely be blamed on the Ukraine war. Domestic shortages continue to unnecessarily lift prices of commodities and our agricultural policy in times of shortages is still unclear,” Velasquez said.
Much of the inflation in the country came down to supply concerns. Owing to the combined effects of global supply chain disruptions, expensive fuel prices, typhoon damage, and a weak peso, inflation has effectively battered the purchasing power of Filipinos.
Even core inflation, computed without volatile items such as food and fuel prices, quickened to 6.5% year-on-year in November. The Marcos Jr. administration is projecting that inflation would average 5.8% in 2022, well above the central bank’s target of 2-4% this year.
To combat this, the BSP unleashed a bevy of rate hikes to tame inflation. Central banks, like the BSP, inject rate hikes to temper inflation within an economy. Ideally, rate hikes effectively control consumption, since higher interest rates would force consumers and businesses to think twice about borrowing money.
The central bank has since shed its accommodative monetary policy stance since interest rates now stood at 5.5%. This came just as central banks everywhere were adjusting their key policy rates as inflation within their economies kept accelerating.
Amid all this, the peso collapsed under the might of the greenback. The peso reached historic-lows halfway through the year as the US economy imported much of its inflation struggles. The US Federal Reserve hiked its benchmark rate at several junctures in an effort to cool down its overheating economy.
This left the local unit to teeter near P60 against the dollar, which would have been its lowest point. The BSP intervened, as it spent $12 billion to defend the peso.
All these effects unspooled the domestic economy, supposed to be recovering from pandemic fallout.
Policy mistakes?
This is where the Marcos Jr. administration could have stepped in, implementing policy reforms that could prevent Filipinos from reeling further.
“The problem was that there was really no stimulus program to counter the scarring effects of the pandemic,” Lanzona said.
For Lanzona, the national government could have addressed the pandemic as a structural issue. The Ateneo economist believed that public officials sought to treat the crisis as another financial crisis.
“Hence, the reforms were limited to monetary and financial reforms. No program for instance were made to support the MSMEs and the self-employed,” Lanzona added. “In fact, aside from the ayuda, there was no long-term program that helped the people mainly affected by the pandemic, i.e., the poor.”
Neri added that the BSP’s policy stance could have been adjusted earlier.
“This not only led to faster inflation, bigger peso depreciation and faster depletion of foreign reserves,” he said.
The BPI economist noted that there could have been two 50 basis point hike in May and June. Rate hikes seep into the domestic economy six months or so after the central bank sets it, as was the case when credit growth broke an eight-month losing streak in August 2021.
“This also led to much bigger, off-cycle rate hikes than the economy needed if the peso's fall and inflation had been managed more aggressively and pre-emptively in late 2021, early 2022,” Neri added.
Velasquez pointed out reforms that the Marcos Jr. administration could have implemented.
“The IRR of the amendment to the Public Services Act (signed by Duterte) has not yet been released. This was expected to be a game changer in bringing foreign investors to the country,” she said.
The new administration could have found ways to use revenue windfall gleaned from the Bureau of Customs and the Bureau of Internal Revenue, Velasquez opined. Even then, she said that the national government has yet to utter a word on any administrative reforms.
“There seems to be little progress on tax bills despite urgency. It seems that both the Congress and the Executive have been busy with a proposal that was never mentioned during the elections and the President’s SONA—the Maharlika Wealth Fund,” Velasquez added.
The Maharlika sovereign wealth fund proved to be a contentious issue towards the end of the year. In its previous iteration, the Marcos Jr. administration sought to include pension funds as seed capital before being struck out by public outcry. Finance secretary Benjamin Diokno expects the Maharlika to be passed into law by middle of 2023.
“We are still waiting for progress from those promised during the President’s SONA,” Velasquez said.