President Duterte trusts his economic managers

The Philippine economy is thriving because of solid fundamentals in place. It may have “paused” when economic growth slowed down to 6 percent in the second quarter of 2018, but it remains resilient amid the trade war involving the US, China and member states of the European Union, and the gyrations in the world financial markets.

The economic managers should be commended for righting the ship at a time when the inflation rate seems to be accelerating and the merchandise trade swelling because of rising imports and slowing exports.

The country’s economic managers, led by Finance Secretary Carlos Dominguez III, Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr., Economic Planning Secretary Ernesto Pernia, and Budget Secretary Benjamin Diokno are performing their task well and it is a good thing that President Rodrigo Duterte is keeping his distance from the team.

With President Duterte allowing the economic managers to run the economy with hardly any interference, the Philippines has broadly stayed within the growth target range laid out in the medium-term period. Our debt and other financial ratios are very manageable and remain consistent with our economic growth trajectory.

The ordinary newspaper reader, however, may be alarmed upon learning that the country’s balance of payments (BoP) widened by 168 percent in the first seven months of the year to $3.7 billion from a shortfall of $1.38 billion registered a year ago. The BoP data should not be taken in a negative context.

The BoP deficit increased largely because of the widening merchandise trade gap that, in turn, is caused by the sustained rise in imports of raw materials and capital goods. Increased imports, especially of capital goods, will later translate into expanded production from factories that will sustain the economic growth.

The merchandise trade deficit, according to the latest statistics of the Philippine Statistics Authority, hit $19.1 billion in the first half, up 62.6 percent from the $11.7-billion gap a year earlier. Imports increased 13.2 percent in the six-month period to $51.8 billion, while exports fell 3.8 percent to $32.7 billion.

Despite the yawning BoP deficit, the gross international reserves still stood at $76.72 billion as of end-July. The Bangko Sentral says the figure represents “more than ample liquidity buffer and is equivalent to 7.4 months’ worth of imports of goods and payments of services and primary income.”

The level of the country’s foreign exchange reserves is one data that the international financial community is monitoring. The reserves indicate a country’s capacity to repay its foreign obligations and we have no problem with that despite the “worsening” BoP. The international reserves, according to the Bangko Sentral, are equivalent to 6.1 times the country’s short-term external debt based on original maturity and 4.1 times based on residual maturity.

Global debt watcher Moody’s Investors Service is unfazed with the country’s BoP performance. The credit profile of the government of the Philippines [Baa2 stable], it says, is supported by a large and fast-growing economy and continued gains in debt affordability, in part because of revenue reforms.

It added strong domestic demand and the economy’s limited reliance on foreign sources of financing shielded the Philippines from the direct impact of abrupt changes in the global macroeconomic and financial environment.

The economic managers are also closely watching the spending ratios in relation to the gross domestic product and revenue generation. Government disbursements are programmed to hit P3.833 trillion in 2019, or 19.8 percent of the GDP, rising to P5.362 trillion by 2022, or 20.7 percent of the GDP. The government is relying on spending as one of the growth drivers of the Philippine economy in the light of a massive infrastructure program.

The planned budget deficit is set at P624.0 billion for 2019, rising to P774.3 billion by 2022. As a share of the GDP, the gap is equivalent to 3.2 percent in 2019, up from the previous target of 3 percent.

Dominguez has assured the people that “the government remains committed to fiscal discipline even as it pursues a high level of productive spending that will clear the way to high―and inclusive―growth.”

A solid revenue program, of course, must back the expenditure program. Revenue collection is expected to reach P3.208 trillion in 2019, equivalent to 16.6 percent of the GDP, before rising to P4.588 trillion by 2022, or 17.7 percent of the GDP.


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