IN case you haven’t noticed, the Philippine government has been out of the business of managing the economy for the last six months or so. And, depending on how you look at it, that could be a positive development.
For the first eight months of 2014, national-government borrowings were down 43 percent from 2013. In August alone, borrowings were P22.8 billion, down 85 percent from P148.9 billion in the same month last year. The Department of Finance said this is part of the Aquino administration’s efforts to improve its fiscal situation, which is true. What’s also true is that spending growth is down, increasing only 4 percent (net of debt service expenditures in August) from 2013.
The government is now talking about all the infrastructure spending that is going to be made in 2016.
The awarding of the massive, P123-billion Laguna Lakeshore Expressway-Dike Project would probably be postponed until early 2016. Other current public-private partnership projects are mere petty cash in the great economic scheme of things. The specifics show that, regardless of the monetary value of the current projects, there is nothing that is economically earthshaking, which is what the Laguna Lake project is going to be. If you look at the ongoing projects, these are really ordinary. The P2-billion Daang Hari-South Luzon Expressway link road serves to increase access to property developments that have been in place for a decade.
The large school infrastructure spending is trying to fill the gap that has been growing for 20 years. Airport expansions are also long overdue, but they are not groundbreaking with a large economic multiplier effect. The P65-billion Light Rail Transit Line 1 Cavite Extension project is very important and will come on line sometime in 2019.
This is all like the lyrics of the 1986 Janet Jackson song “What have you done for me lately?”
But the government agency in charge of the economy right now is the Bangko Sentral ng Pilipinas (BSP). Unfortunately, its powers are limited, and the best that it (and we) can hope for is that it would be able to take advantage of external conditions. BSP policy decisions can try to push the Philippines’s economic ship, but, like a tugboat on the Manila Bay harbor, they can only have so much influence.
While the BSP, in my opinion, allowed inflation to grow too high and too fast by ignoring the signs seen 18 months ago, it may have gotten lucky with a three-point shot when they raised interest rates the first time. If i nflation for September is lower than the 4.9-percent rate in the previous two months, the worst may be over.
Right now, the most important positive thing that government could do for the economy is to get the inflation problem under control.
Actually, if the BSP had raised interest rates in March when they should have, the inflation problem would have not existed and the economy would have been stronger. Higher interest rates at that time would have caused the peso to appreciate, unlike now when the peso is weak, in spite of higher Philippine interest rates. There is just too much upside pressure on the US dollar now.
Inflation in the Philippines rides on two factors: the exchange rate of the peso and the price of crude oil. These two factors are not mutually exclusive and go together like chicken adobo and rice.
The peso-dollar exchange rate has actually changed from January. But the global price of crude oil is down substantially. In peso terms, a barrel of crude oil cost P4,760 at the beginning of the year. Now that same barrel costs P4,155 for a decrease of over 12 percent.
A 12-percent decrease in oil prices should have brought inflation way down, had the BSP done a better job. Now, we need at least one more interest-rate increase. This would actually increase economic growth, as money would be better allocated to more profitable investments.
We need inflation to come back to the 4-percent area, and we need that to happen quickly.
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