By Sonny Africa
In a speech before leaders of the Association of Southeast Asian Nations (ASEAN) in Bali, Indonesia, Pres. Rodrigo Duterte said that the country is on an “upward trajectory of growth”. He was echoing the country’s economic managers who were recently touting a recovery of Philippine economic growth to the 7-8% target next year. They claimed that this will be sustained at 7% for a decade on the back of the Build, Build, Build (BBB) infrastructure program.
Reacting to Pres. Duterte’s speech, the indefatigable revolutionary Jose Ma. Sison called it first with a Facebook post: “Duterte delivers fantasy speech about the Philippine economy in Bali.” The decade of 7% growth will not happen because the economy remains vulnerable amid an increasingly unfavorable global economic situation. Difficult, not better, times are ahead.
The Duterte administration seems to be in a little bit of denial. Major macroeconomic indicators have been taking a turn for the worse – not all at once but one-by-one and steadily mounting. The soaring inflation and peso treading historic lows have been the most in the news. But aside from these are slowing growth, bloating trade and balance of payments deficits, portfolio investors exiting, weaker remittances, and falling international reserves.
If the government does not change its economic policy thrust including correcting its exaggerated expectations from the BBB program then it’s pretty unlikely for the economy to achieve 7% growth for the next 10 years.
The economy is vulnerable with a worsening global economic situation. High inflation since the start of the year marked the Philippines going into a more difficult period including rising interest rates and peso depreciation. The signs are that the country will just keep going deeper into this.
The United States (US) Federal Reserve has raised interest rates thrice this year with a few more to come perhaps even starting as early as December. Capital outflows chasing higher returns abroad will be further downward pressure on the peso. Looming sanctions on Iran will likely push up oil prices adding pressure on our already beleaguered chronic trade deficit. These major sources of inflationary pressure are not a growth-enhancing situation.
The Bangko Sentral ng Pilipinas (BSP) will likely be pushed to raise domestic interest rates further as a stock response to inflation and to rising global interest rates. The resulting increase in the domestic cost of capital will dampen investment and consumption.
These are happening amid a lackluster and actually increasingly unstable global economy. Not only are trade wars brewing among the world’s economic giants, particularly the US and China, but financial flows are becoming more volatile. The huge accumulated global debt stock is a huge disruptive force in capital and currency markets.
The government should be more circumspect in what to expect from its BBB program and not be so awed by this. The short-term boost is unlikely to be as big as expected. There are nagging concerns about the absorptive capacity of the government, private sector and the economy to fully and consistently implement the BBB program. Financing will also become more difficult as interest rates rise and as slowing growth means the government’s debt burden increasing as a share of gross domestic product (GDP).
But even then the hyped BBB is at best just a short-term Keynesian demand boost with limited long-term benefits disproportionate to its costs. Long-term gains are dubious because while infrastructure is necessary for development just building them is hardly sufficient for this. Sustained and sustainable growth at levels of 7% or higher are only possible if the country industrializes.
Yet there is no sign that the heavily National Capital Region (NCR)-Central Luzon-Southern Tagalog- and transport-centric BBB is designed to support the development of specific industries according to a larger national industrialization plan to diversify and upgrade the economy. Absent such a plan, any resulting improved mobility will not be enough to transform the economy from its current service-orientedness and import-dependence – and, if anything, will likely just reinforce this.
Brewing economic storm
So when making such extravagant growth claims, the government does not seem to be taking account of the growing interest rate, exchange rate, and inflationary pressures. Externally-driven demand also weakens upon weaker overseas remittances and net exports. The acclaimed infrastructure offensive will not be able to overcome these immediate headwinds nor, indeed, transform and industrialize the economy.
And of course these are on top of growing political instability with paranoid anti-government conspiracies, concerns about the real state of the president’s health, and a possible renewed self-serving offensive to change the Constitution.
The poor majority have long been buffeted by high prices, low and uncertain incomes, and growing joblessness. The favored economic propaganda of a rapidly growing economy has long been disconnected from their lived experience and reality of daily economic crisis. The Duterte administration must privately already be very alarmed though. The brewing economic storm will shred the last vestiges of their hollow narrative of rapid growth and development. ###