The years of hoisting “fighting targets” are probably over.
During the period of “fighting targets,” our economic planners forecast growth rates that were nearly impossible for the real economy to achieve. In every year we had “fighting targets,” our economic growth failed expectations.
“Fighting targets” are not without costs. On the basis of much higher growth forecasts, we raised revenue expectations as well. We expanded our spending portfolio. Everything became unrealistic.
When revenues fell below target and spending went unbridled, we incurred budget deficits. Since our deficits were chronic, our public debt ballooned.
Last week, our indebtedness climbed to over P15 trillion. That is an important milestone.
This year, we expect to borrow P2 trillion more – and keep on borrowing in the years after that. It is easy to imagine that our outstanding public debt will hit P20 trillion before this administration ends.
We are, after all, operating a “pork barrel” state where subsidies are abundant and taxes chronically insufficient. Our politicians are always eager to buy popularity by identifying with subsidy programs, be they larger discounts for senior citizens or free fertilizer for farmers.
Our fiscal managers try to reassure us that the outstanding public debt is not that bad. The debt service remains within the prudential norms. Two-thirds of the public debt is incurred domestically and in pesos. That reduces the risks posed by dramatically realigning currency exchange rates.
But by borrowing from domestic sources, government crowds out private users of our scarce capital. Most of our financial institutions happily subscribe to government issued bonds because they are nearly risk-free. By doing that, they end up lending less to private borrowers who might be more efficient in using capital resources.
This week, the Development Budget Coordination Committee (DBCC) reduced our 2024 GDP target from 6.5 to 7.5 percent to between 6 and 7 percent. The President approved the lowered growth target during the 16th Cabinet meeting.
The announcement did not make the headlines. In most papers, it was a below-the-fold story. Perhaps it was thought the adjustment was marginal.
In fact, the adjustment is significant. As adjusted, our growth targets now more closely approximate the forecasts of multilateral institutions and corporate think tanks. We are no longer in the business of making wild growth forecasts.
The reason for the downward adjustment is an unhealthy global environment. Growth for the developed economies will range from 2 to 3 percent. That means the markets for whatever few exports we have will not be booming.
With slow average global growth, consumers will be scrimping. There is no rush to invest in new manufacturing capacity.
We are not likely to see interest rates rolled back dramatically this year. Inflation lurks. The high interest rate regime we have is a barrier to new investments. The only entities undeterred by the high interest rates are governments addicted to debt.
A combination of geopolitical factors will keep oil prices high. OPEC is maintaining its reduced production. Ukraine has developed enough drone technology to hit Russian refineries far inland from the borders, knocking off 15 percent of Russian production. The US needs to refill its strategic reserves – although it is in little hurry to do so because of domestic political implications. In fact, one US spokesman publicly pleaded with Ukraine to desist from hitting Russian oil facilities.
Tensions remain high in the Middle East. This week, Israel bombed senior Iranian military officers directing the radical militias armed by Tehran and operating out of a building in Damascus. Iran vowed to seriously retaliate. This might mean an actual fighting between Israel and Iran.
Meanwhile, in Iran’s restive Baluchistan region, a major assault seems underway from separatist Sunni militias. These Sunni militias are believed to be crossing over from Afghanistan to mount their raids. It is not yet clear how much the fighting in this region will escalate. At any rate, fighting within Iran threatens an important source of oil – at least for those countries defying the economic sanctions imposed on Tehran.
Those who support Ukraine may cheer the drone attacks on Russian refineries and the troubles Tehran is now encountering with her own minorities. But both events spell even lesser oil supplies and higher fuel prices for everybody else. This will provide push factors for global inflation.
The Chinese economy is troubled. It is forecast to grow at 3 percent or less. The property development balloon has burst with serious possibly financial consequences for the world’s second largest economy.
Europe will be diverting investments to boost its defense. That means less investments for consumer-directed industries and possibly contraction for some economies in the region.
Even with lowered growth targets, the Philippines will still post among the highest expansion rates in the world. That is not saying much, of course. We are dealing with a much lower base owing to years of weak performance, explaining why we have more headroom for expansion than most everybody else.
But it is not only our growth prospects that have been lowered. Recent surveys show a substantial decline in the popularity ratings of the President. This will translate into diminished political capital on the part of the national leadership. That diminished political capital in turn lowers the appetite for pushing reforms – especially the hard ones that require both courage and foresight.
We cannot afford to postpone reforms. The nation’s capacity for delivering a better future rests on realizing these reforms.