IT IS common for players and observers of the Philippine economy to say the economy is weathering the global economic crises and coming out relatively unscathed and that our financial and banking system is strong and has been well prepared for the volatilities that was triggered by the collapse of Lehman Brothers and pervaded the global financial markets.

This observation has been generally true.  While it was expected that slowdowns in our major trading partners would have negative repercussions on our exports of goods and services, the forecasts were still for moderate growth with the help of stimulus packages.

However, the results of the first-quarter macroeconomic figures showed a growth of only 0.4 percent.  While this could be a one-time occurrence to be followed by upward adjustments in subsequent quarters, the global trends indicate that this would not be the case.  It is, therefore, important to understand the forces and trends that have adverse effects on the Philippine economy.

Consumer-led growth

THE No. 1 driver of the Philippine economy over the past several years has been consumer spending.  This has been fueled by growing remittances from overseas Filipino workers (OFWs) and returning Filipinos as visitors or investors in housing.  This had positive contributions to Philippine retail businesses such as shopping malls, tourism and entertainment, as well as sales of housing units and consumer durables such as cars and appliances.

However, consumer spending slowed down substantially in the first quarter of this year. And this seems to have occurred not so much due to loss of jobs or reduction of income but more because of loss of confidence.  OFWs tried to save more and/or convinced their beneficiaries to save more because of the uncertainties in the world economy. 

The confidence factor in consumer spending may be around for some time, unless there is a major turnaround in the world economy.  However, based on the prognoses of most forecasting bodies, recovery from this global recession will take some time.

Domestic stimulus

THE normal cyclical policy to recessionary trends is fiscal spending and loosening monetary policy.  We have seen the stimulus policies pursued by China and the United States, among others.  In China, it seems to have been more effective than in the United States. 

The Philippine Central Bank has already brought down its policy rates to equal to all-time lows.  However, for low interest rates to work, it also require businesses and consumers to take advantage of this and borrow to expand capacity and consumption.  This does not seem to be happening enough and the issue could be confidence once again.  A business will not expand and a consumer will not increase consumption on borrowed money unless there is confidence to make profits or savings later on after servicing the debt.

Fiscal spending to stimulate the economy seems to be having a hard time getting off the ground.  The disbursement process and the absorptive capacity of projects has always been an issue in the country.  Unfortunately the bureaucratic layers that are believed to be pervaded with corruption make quick disbursements automatically suspect and subject to political and legal challenges that makes it very difficult to carry out quick counter-cyclical policies.     

Budgetary constraints

THE budgetary constraints of the Philippine government leave little room for fiscal stimulus.  Economic slowdowns normally imply less tax and customs revenues.  Since the Philippine fiscal position is perennially in deficit, there are no prior years’ surpluses to spend.  As a contrast, look at the situation in China.  It has had huge surpluses and over $1 trillion in reserves.  It can now spend without endangering its fiscal position.

The recourse of the Philippine government is to borrow and that is what it is going to do.  After a successful dollar-bond issue at the beginning of the year and announcing that it has done its commercial foreign-currency borrowings for the year, the government has announced a new yen-denominated issue.  Borrowings from other governments and multilateral institutions for economic stimulus are also being pursued.

Policy implications

THE world economic crisis that now besets us should present an opportunity for the government to review and start overhauling economic policy.  Among these:

1.                  The taxation system relies too much on the source of the transactions.  When the volume of taxable transactions go down, revenues also go down at times when it is most needed.  The base of income taxpayers based on salaries, executive compensation and small businesses has to increase.  The way to increase this is to improve the collection system to ensure and make the public see that all that they pay go into the government coffers.  Increasing the rate of taxation is absolutely not the solution.

2.                  The economic structure has to be improved so that its long run or secular growth would also be “investment-led” and “export-led,” and not always have consumption growth as the No. 1 driver.  This issue brings us back to the issues of tax collection to have the revenues for infrastructure and a benign investment climate that provides a level playing field free from corruption.

3.                  It must be recognized that the flows from OFWs is a fortunate happenstance arising from the drive, sacrifice  and cultural makeup of our countrymen that gave them competitive advantages in the world’s labor and jobs markets.  They are where they are because of their decision and oftentimes no better options in the domestic economy.

Therefore, the OFW phenomenon should not be considered as part of strategic economic policy. In fact, economic policies should be to bring in the investments and put up the infrastructure that will create the jobs domestically.

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Free Enterprise is a rotating column of members of the Financial Executives Institute of the Philippines, appearing every Wednesday and Friday.