POOR-QUALITY jobs and the scarring effects left by the pandemic have reduced the country’s long-term growth potential to only 6 percent, according to the Asean+3 Macroeconomic Research Office (Amro).
In its Annual Consultation Report for the Philippines, Amro said this was a reduction of 2 percentage points from the initial estimate of 6.2 percent between 1998 and 2019.
However, given the impact of the lockdowns and poor quality jobs, the country’s GDP growth trend between 1998 and 2023 is now at 6 percent.
“Lower job quality and a slow recovery in investment are the major scarring effects in the Philippines. Although the labor market has rebounded faster than expected since 2022, job quality has deteriorated, with a lower share of high-skilled jobs,” Amro said. “Furthermore, a sharp drop in investment during the pandemic has reduced capital formation and long-term growth potential.”
According to Amro, its estimate is higher than the latest estimates of the World Bank which now forecasts the country’s average growth between 2020 to 2029 to only average 5.7 percent.
Amro said the deterioration of job quality partly reflected lower labor productivity and could be explained by an unwanted structural shift in the labor market.
Structural shift in labor market
Citing a study titled “Labor Productivity, Structural Change, and COVID-19,” authored by former Socioeconomic Planning Secretary Emmanuel Esguerra and University of the Philippines economist Karl Jandoc, Amro said an example of this could be the “return to low-productivity pursuits in agriculture.”
A further explanation of the labor situation, added Amro, could be found in the study titled “Labor market implications of the Covid-19 pandemic in the Philippines” which was edited by former Socioeconomic Planning Secretary Dante B. Canlas and published by the Bangko Sentral ng Pilipinas (BSP).
“Developing a digital economy is essential to improve the growth potential, and this can materialize only by upgrading labor skills and attracting substantial investment,” Amro said.
It also noted that the country’s long-term growth potential will suffer due to the pace of infrastructure development which remains a key challenge for the economy.
Infrastructure investment in the Philippines continued to lag behind its regional peers causing it to be less competitive in the region.
Citing data from the World Economic Forum, Amro said the country is lagging behind in transportation infrastructure, especially road infrastructure followed by information and communications technology (ICT) and utility infrastructures.
The Philippines is also threatened by geopolitical tensions between China and the United States. However, it stressed, these tensions can also become economic opportunities.
These tensions can be a headwind for the Philippines if these create “substantial uncertainties” that could “erode market sentiment and hold back foreign investment in the country,” it explained.
However, the reconfiguration of supply chains, such as “China Plus One,” could benefit the Philippines. This will especially be the case in investment and trade if the country closes the infrastructure gap.
The benefits could also be significant if the quality of the country’s labor market is enhanced and the business environment is improved to attract industry relocation to the country.
Climate, other threats
Meanwhile, other threats to the economy’s long-term growth, Amro said, is the country’s vulnerability to the ill effects of climate change. The country is considered one of the most disaster-prone in the world.
“The impact of climate change has become more severe due to environmental degradation caused by rapid socioeconomic development in the absence of adequate mitigating environmental plans,” Amro said.
Amro noted that tropical cyclones continue to cause numerous deaths and extensive damage in the country, while flooding due to heavy rainfall also significantly affects various regions.
Citing data from the United Nations Office for the Coordination of Humanitarian Affairs (OCHA), Amro said 18 tropical cyclones entered the Philippines’ Area of Responsibility in 2022, and five made landfall.
These included Typhoons Paeng which caused P5.7 billion in damages to infrastructure and P7.1 billion in agriculture. It also caused at least 156 deaths.
Amro also said in December 2021, Typhoon Odette/Rai brought massive destruction to the Philippines, where a response was needed until 2022.
It added that between December 2022 and February 2023, there were a series of floods caused by heavy rain, severely affecting central and southern parts of the Philippines.
“Sea level rise poses a chronic risk of flooding that would lead to huge economic losses resulting from widespread population resettlement and extensive reconstruction efforts. These physical risks will likely be exacerbated by climate change,” Amro said.
“Thus, the rising costs of these risks could become a major burden on fiscal resources and jeopardize financial stability, underscoring an urgent need for climate change adaptation in the Philippines,” it added.
In order to address these long-term threats to growth, Amro said the Philippines should institute fiscal reforms at the soonest. This will help prevent “sharper and more painful adjustments later.”
Among these reforms are those needed to quell the concerns raised about the Military and Uniformed Personnel (MUP) pension scheme, as well as the sustainability of the Social Security System (SSS) and the Government Service Insurance System (GSIS).
Amro noted that the previous pension system for MUP collapsed due to mismanagement, while the current MUP pension scheme is expected to pose a massive fiscal burden in the medium to long term.
Citing the Bureau of the Treasury, Amro said the MUP pension spending is expected to increase to P240 billion by 2028 and P1.5 trillion by 2040 from P125 billion in 2022.
Amro also said the main reform measures of the MUP include the contribution from both MUP and the government, no automatic promotion to the next rank upon retirement, and no automatic indexation to the salary of active personnel of the same rank (currently automatic indexation).
The reforms also focused on the minimum pensionable age at 57 years old and the professional management of the pension fund by GSIS.
“The Amro mission welcomes the government’s discussion on MUP pension reforms, and recommends completing it without delay by considering fiscal sustainability, income support, and equity across different pension systems,” the report stated.
“In the longer-term perspective, the SSS and GSIS pension reforms should also be reviewed to enhance their financial sustainability,” it added.
Earlier, Amro estimated that the country’s GDP growth will only average 5.6 percent. It said the country’s economic growth will be clouded by various factors and challenges but the short-term challenge is inflation.
Amro said the country’s headline inflation is expected to rise to 6 percent in 2023 from 5.8 percent in 2022. This is expected to moderate to 3.6 percent in 2024, within the 2 to 4 percent inflation target of the BSP.
Image credits: Nonie Reyes