Economic Effects of the ZTE Scandal

Partly in jest, my balikbayan and OFW dependent friends are still complaining that even with the political crisis and circus, the peso to dollar exchange rate is still low and they are still receiving 20 percent less  pesos than what they were getting two years ago. They would just be happy if it gets back to 43 to 45 to the dollar even at the cost of a little more political instability. This is a significant insight as this has something to do with the consumption portion of the GDP/GNP which is part of the overall economic growth.

Coming from a 7.4 percent economic growth of the Philippine economy from 2006 to 2007, the higher base  and the U.S. economic recession will surely dampen our economic growth this year, with or without the political crisis. The growing consensus among bank economists is that the Philippine economy will grow at the 6 percent range.

Breaking down the Macro-economy into the components, Consumption(C), Investments(I), and Government(G), which is the demand side of the GNP, will give us an idea of what component will be affected by the political crisis. Domestic consumption will not be affected and will grow, as the improving economy and the continuing inward remittances have increased the disposable income of the consumers. Investments will also grow as domestic investments of companies will continue due to the increase in sales, particularly in the housing, mining, outsourcing, tourism, and food sectors. Foreign investments may slowdown temporarily due to the political noises, but the bulk of foreign direct investments are well studied long term investments, so they will come even if delayed. Portfolio foreign investments, “hot money”, will decline which will affect the stock market and the money and foreign exchange market, which is not entirely bad. The current prices in the stock market went down and the peso depreciated a little, but not as much as it did in prior political upheavals.  The Government component of the GDP/ GNP will grow as the 2008 budget has been approved and the operating expenses and the CAPEX of the government have to be spent. The foreign funded infrastructure spending of the government may be delayed as this is related to the ZTE scandal, but those already  approved, will proceed. The controversial ones will be on hold, which may just be as well, since their positive economic impact to the country is doubtful.

On the micro-economic side, given the growing economy, the companies should be experiencing growth and profits depending on their individual cost structure and managements. Employment should be better and inflation under control, even with oil prices at $100 a barrel. The policies on energy dependency, budget deficits, and monetary policies are in place and will not be reversed or changed by any government that wants to stay in power or replace those in power. From the Estrada administration to the first few years of the Arroyo administration and the reelection of  President Arroyo, the government finally got their economic policies right. This was because she no longer had to contend with a reelection bid and was able to make the hard decisions that was good for the economy. It is just too bad that she could not make the hard moral decisions on the graft and corruption issues.

The long term effect of resolving the moral issue in the ZTE scandal has economic implications. If it means better accountability of government officials on government finances, then it will mean a lot of savings to the government. The overprices in government procurement and purchases which is estimated at 200 billion pesos a year, if reduced by 50 percent, will mean a hundred million pesos, which can build more school buildings, farm to market roads and bridges, or create more jobs. If it means closer scrutiny by the civil society, and the people in general, of the government projects and the politicians, it will mean not just better projects but also better politicians.

So, on the whole, the Philippine economy can withstand a political crisis or instability from Intensity 1 to Intensity 5, with the reduction in GDP/GNP growth in the 1 percent to 2 percent. It can even withstand a change in government with the economy growing by only 3 percent to 4 percent. So, it is up to us to determine if this is a price worth paying for the morality that is crucial to the future of Democracy.