Optimism amidst negative prognoses

Against an avalanche of negative prognoses, Finance Secretary Benjamin Diokno remains optimistic that the Philippine economy will be able to catch up despite the totally unexpected 4.3 percent sluggish growth exhibited during the second quarter of 2023.

With the government’s growth target set at between six to seven percent this year, the country’s poor economic performance during the quarter from April to June had the whole economic team flustered with the reality that the yearend target would in more probability be difficult to achieve.

Diokno, as head of the economic team, was quick to point out that all may not be lost if the government resorts to an “aggressive catch-up plan for infrastructure projects (roads, bridges, airports, seaports, power, water, irrigation, telecommunications facilities, digitalization, school buildings, housing and others), quicker response by GOCCs [government-owned and -controlled corporations], and strong and deliberate spending by resource-surplus local governments” during the second half of the year to counter the weak second-quarter growth performance.

Before we give judgment on the government’s economic team’s salvage plan, let’s try to understand what many economists had failed to see. A review published by BMI, a Fitch Solutions company, points to weaknesses in almost all areas of the economy.

Missed signs

In particular, BMI pointed to sluggish investment numbers during the second quarter. The biggest drag was government consumption, which contracted to 7.1 percent year on year during the second quarter, from a growth of 6.1 percent year on year in the first quarter.

Some guys in the economic team forgot the effect of national elections on GDP data, and failed to factor in correctly the possible warped data resulting from the “normalized” political environment without the buoyed election spending.

Other areas that showed poor headline growth were in gross fixed capital formation (3.9 percent from 10.9 percent), imports of goods and services (0.4 percent from 4.7 percent), and even private consumption (5.5 percent from 6.4 percent).

The latter was expected to significantly ramp up consumer spending and, therefore, contribute to a higher gross domestic product (GDP) during the second half of the year. Apparently, the lowered income tax payments of many salaried workers that took effect this year did not result in more money circulating in the system.

The above missed and misread signs are to blame for the general complacency among our government technocrats during the second quarter, in effect catching them with their pants down. Daresay we that if a more aggressive spending program by government had been pushed at the start of the second quarter, the economic team would not sound so hapless today.

Moving the needle

Given the local and global current situation, the vowed remedies may not be able to move the needle. The planned aggressive spending on infrastructure is often saddled by bureaucratic procedures that involve time, which is the worst enemy of a catch-up plan.

Bids have to be filed, vetted, and discussed before a decision can be made. Have you ever seen a major government infrastructure project jump to groundbreaking status in six months or less?

Both the Transportation and Public Works and Highways departments have always been called out for underspending their budgets despite the improved capability of the Department of Budget and Management to facilitate the release of approved funds.

The other side of all this urgent call to quickly spend allocations is the risk of not doing the proper paperwork which, in the process, could only mean wasting government funds that end in mismanaged projects. Remember, too, that the Philippines is still notorious for corruption.

Still, we can only wish the economic team a sincere good luck so that we don’t end the year losing our country’s status as one of the fastest growing economies in Asia. Almost all analysts had just revised downward the Philippines’ growth projections for 2023 and 2024.

Other limitations

Other fundamental limitations hound the country’s desire for a six percent growth. Business has been cautious, especially with the current high cost of money. The Bangko Sentral ng Pilipinas is not inclined to bring down interest rates, which is now 425 basis points higher from the second quarter last year.

Decisions to borrow funds to finance expansion projects are being dealt with cautiously, especially since the cost of borrowing is not expected to be lowered anytime soon. Even the general business sentiment is less optimistic about how the economy will fare under the end of the year.

The contribution of agriculture to the overall economy is at further risk of a drier El Niño that is likely to hit hard in the last quarter and onto the first quarter of 2024. The damage to agricultural produce and infrastructure brought about by the recent typhoons will be felt in the third quarter.

There’s not much to expect from exports, too, as countries like China are trying to overcome headwinds that are causing slower economic growth. Japan may have reported a robust second quarter performance, but it has its own problems that affect its appetite for our export products.

Perhaps the biggest damper would be inflation, which has a high risk of going up again after having gone down inch by inch during the last seven months. Already, the price of rice in wet markets has risen by double digits. How long the government is unable to intervene will define how bad food inflation will be in the coming months.

Somehow it feels that we’ve just woken up from a nightmare of being on a bus headed for a crash, only to realize that the nightmare is really already happening. And I thought the country’s economic fundamentals were solid.

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