By Gilbert Llanto
PIDS
The
Philippines has performed well in the past
few years relative to its peers. It demonstrated great resilience to exogenous
shocks that would have undone less capable economies. But will it be able to
sustain its positive economic position?
There are positive signs. Revised
forecasts put GDP growth in 2015 between 5.7–6 per cent and forecasters expect
a strong rebound in the coming year. The government has maintained an official
forecast of 6–7 per cent. It expects higher growth in 2016, even when the
current administration ends its term of office in June.
Policy reform efforts led to sound
macroeconomic foundations and an improved governance framework. Both these
factors encouraged investment and business activity as well as a consistent
build-up of foreign exchange reserves. Foreign exchange reserves sat at US$80.6
billion at the end of November—enough to cover over 10 months of imports and
payments of services and income. And international credit rating agencies have
upgraded the Philippines’ credit rating thanks to policy reform.
The Philippines also sustained
consumption growth due to substantial remittances from overseas Filipino
workers (around US$20 billion) and low inflation. The services sector — mainly
the IT Business Process Outsourcing industry — has significantly contributed to
output and employment. Strong internal demand will remain as a significant
growth driver in the future.
The government has successfully
worked for the recent passage of critical reform laws: competition policy,
liberalizing the banking system, as well as managing and improving transparency
of tax incentives. It has strengthened universal health insurance and sustained
its conditional cash transfer program which covers millions of poor families
and has been designed to improve the education and health status of the poor.
But the issue is whether the economy
can sustain this record growth performance amid very challenging
times. Certain headwinds could make for rough sailing.
As the Philippine economy integrates
more closely with the global and regional economy, external events will have a
bigger impact on domestic growth prospects. Weak external demand will have
negative impacts on the growth of trade and services. The Philippines had a
trade deficit equivalent to US$3.8 billion in October. China’s slowing growth
and recession in Japan do not bode well for the economy. Weaknesses among
ASEAN’s major trading partners will also have negative spillover effects on
ASEAN member states like the Philippines.
Because of this, there is a great
risk that trade-led growth may not be a viable option for the Philippines in
the immediate future. The Philippines still suffers critical development
constraints: infrastructure is inadequate and there are problems with
connectivity. It does not help that government spending has been somewhat
constricted by procurement processes and bureaucratic inefficiency. Populist
legislators have also introduced revenue-eroding measures. The current
Aquino administration created significant ‘fiscal space’ — a measure of
the government’s room for policy maneuver — but this could eventually
disappear, much to the regret of the new administration after the national
elections in May 2016.
The Aquino administration ends on 30
June 2016 and, according to the Constitution, the current president cannot run
for re-election. As in the past, there will be a peaceful and orderly
transition to a new government, but the issue of succession provokes several
questions. Will the next leader be as committed to policy reform and improved
governance as Aquino? Will there be policy reversals because of tremendous
pressure from opportunistic politics? Will the next leadership be able to put
together an able and responsible team who will stay the course and tackle
the more difficult reforms in policies and institutions?
There will not be a lack of
contenders in the political market who might put political expediency over
difficult reform. This poses a danger to the economy because Philippine
politics is already personalist and opportunistic. Many voters don’t vote on
issues but are mesmerized by personal charisma and (empty) promises made by
political entrepreneurs.
The challenge to the electorate is
to select a leader who will not flinch at the sight of difficult reforms. On
the contrary, they should have the courage to make bold policy decisions and
inspire the government machinery to implement them. The electorate needs to be
better informed and educated. The Philippines’ recent growth experience was
made possible by reforms in governance and policy.
This year’s success could serve as a
reminder to the electorate to choose the right leaders. A rising middle class
engendered by continuous growth, returning overseas Filipino workers who have
experienced living in well-functioning societies, as well as better informed
young voters who actively participate in social media could hopefully
constitute the swing vote for a leader with the best interest of the country in
mind.
Meanwhile, the current Philippine
leadership must fully utilize its remaining political capital to pursue
difficult reforms covering trade facilitation and regulatory frameworks. It
must continue to invest in both human and physical capital that will raise
productivity in the future.
(Gilbert M. Llanto is the
president of the Philippine Institute of Development Studies.)
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