Insights on financial markets and economic performance from PES 55

Over the next five years, the Philippine Development Plan will aim to build a solid foundation for more inclusive growth, a high-trust and resilient society and a globally competitive knowledge economy. Posing a threat to achieving these goals, however, are domestic and international risks, such as delays in the much-awaited “Build, Build, Build” program and comprehensive tax reform, peace and security issues, American protectionist policy and Brexit. With “Growing Amidst Risk and Uncertainty” as its chosen overall theme, the Philippine Economic Society (PES) held its 55th Annual Meeting at Novotel Manila, Araneta Center, on November 8 to discuss how the Philippine economy would be able to cope with internal and external risks.

One of the breakout sessions linked the overall theme with financial markets and economic performance. Bank of the Philippine Islands (BPI) sponsored the panel, and its very own Emilio S. Neri Jr. shared his economic and financial-markets outlook for 2018. Indeed, the BPI economic briefing gave some thought-provoking insights, which could be organized as follows: 1) where the Philippine economy has been, 2) where it is right now, 3) where it must go in the future, and 4) how it can get there.

Where has the Philippine economy been? The briefing began with a review of the historical relationship between the external position of the Philippines and its overall economic performance. The data suggest that balance-of-payments performance has had a considerable impact on economic growth, employment, credit conditions and financial-market performance. In the past, there were episodes of economic slowdown and contraction that occurred because the economy was pushed beyond its capacity limits. Major factors determining the vulnerability to a downturn were external leverage, credit boom, asset inflation and supply-side shocks.

Where is the Philippine economy right now? It should be examined whether the current economic performance shows any sign of overheating based on historical trends. Compared with previous episodes, the economy appears to be in a relatively stable condition; however, risks could likely come from lofty asset-market prices and rapid-credit growth, which the Bangko Sentral ng Pilipinas (BSP) has been monitoring closely.

Much concern has also been expressed over the underperformance of the Philippine peso versus other regional currencies over the past year. Analysts note, however, that over a 15-year period, the exchange rate has fluctuated over a wide range, and recent fluctuations have not been as sharp as in 2004, when the exchange rate hit 56 pesos to a dollar. So, the peso may have been weak over the past year, but over the longer term, it appears to have merely reverted to its long-term average. In fact, the recent depreciation is modest, with a pickup in capital goods imports being the main driver.

Peso depreciation could also be viewed as more beneficial than harmful. While some think that a weaker peso might be harmful because it makes imported production inputs—and, ultimately, final goods and services—more expensive, in the current environment, a weaker peso could even imply greater consumption power for beneficiaries of overseas Filipino workers, whose cash remittances have grown to $20.781 billion by September this year, up by 3.8 percent, from the $20.025 billion that flowed into the country in the comparable nine months of 2016. This growth is still close to the BSP forecast of 4 percent for 2017; thus, consumption-spending-led growth will likely continue in the
medium term.

Where must the Philippine economy go? To continue its expansion, the country should focus on two critical items: “Build, Build, Build” and comprehensive tax reform. Although estimates point to current account deficits, such deficits would be driven by greater importation of capital equipment for building more infrastructures. This importation will expand the domestic capacity to produce goods and services, which could mean greater exports and competitiveness of Philippine industries.

The passage of tax reform before the end of Congress (probably before the last week of December) would be a welcome Christmas gift, as it would boost investor confidence and invite much-needed foreign funds into the system.

How can the Philippine economy get to where it must go? If the immediate (myopic) concern is inflation, the textbook response is to raise interest rates via money-supply contraction. This, however, would be a blunt instrument to use, as it could inflict more harm by hampering consumption and investment activities. The low-interest-rate environment is still here, and inflation remains benign. Macroeconomic conditions remain conducive for business, so the market-friendly solution is to simply let the exchange rate adjust accordingly.

In conclusion, the Philippine economy could be likened to a tightrope artist who is trying to walk while winds are constantly blowing from all directions. Balance is a key theme that emerges out of all the discussions. Now more than ever, the country needs to prove that it can walk
its talk.

Ser Percival K. Peña-Reyes is a faculty member of the Ateneo de Manila University Economics Department. He thanks Mr. Emilio S. Neri Jr. (ADMU AB Economics, Batch 1989), vice president and lead economist of BPI, for valuable comments to this article.