The Market Monitor Minding the Nation's Business
Luis Leoncio
Underspending in the government remains a spoiler to the Philippines’s economic growth momentum, according to the Philippines Economic Update that the World Bank (WB) released recently as the multilateral lender slashed growth projections this year to 6.5 percent from the previous 6.7 percent.
The report indicated lower government spending, including investment delays and slowdowns, combined with weaker exports, also likely limited economic growth to 6 percent last year against its forecast of a 6.4-percent expansion in the gross domestic product (GDP).
It said that for last year, the revised growth projection took into account lower-than-expected government spending in the third quarter and limited opportunity to improve spending in the fourth quarter.
It noted, however, that growth in 2015 will benefit from a base effect, given the weak government spending in 2014. But the WB warned that further delays in major public-private partnership (PPP) projects and the slowdown in approved investments would constrain growth of private investment.
“Unexpected supply crunches in the power sector in April to May 2015 could also dampen economic growth,” it added.
The report said the Philippines, going forward, needs to accelerate reforms that could translate higher growth into more inclusive growth that creates more and better jobs.
It said the challenge is for poverty in the country to be reduced massively and prosperity shared by more people.
Already, between 2012 and 2013, the rate at which economic growth reduces poverty improved significantly between 2006 and 2012.
“If these trends are sustained, the government’s target of reducing the incidence of poverty to 18 to 20 percent by 2016 is attainable. Over the long-term, if growth is sustained at 6 percent per year, per-capita income can double within one decade, grow five times in two decades, and reach 11 times in three decades,” the WB report noted.
The recent contraction in agricultural value-added and employment risks undermined the government’s poverty-reduction efforts because agriculture is where most of the poor find a livelihood, it added.
The report also said eradicating poverty and boosting shared prosperity require implementing an already well-known policy agenda of structural reforms in key areas, including the increasing of investments in infrastructure, health, and education, enhancing competition to level the playing field, simplifying regulations to promote job creation, especially by micro and small enterprises, and protecting property rights to encourage more investments.
Elusive inclusive growth
Over the medium- to long-term, higher investments in infrastructure, health, and education, are key to achieving inclusive growth.
The report also noted the backlash of weak infrastructure on the economy.
It said, for instance, that in the last decade, Metro Manila experienced high and sustained economic growth, but infrastructure deficits have led to worsening road congestion.
“This costs the economy around 8 percent of GDP annually. To address the worsening congestion, the national government and various city governments have implemented ad hoc measures to limit the number of vehicles on the road, sometimes with inadvertent and occasionally severe consequences, as the Manila port congestion of 2014 demonstrated,” it added.
However, the real solution lies in taking measures to create new and better road networks and mass transit systems, it said.
The WB also cited the potential power-sector shortages in Luzon as a threat to growth.
Luzon may suffer power shortages between April and May of 2015, brought about by aging generation plants, lack of reserve capacity, and the deficiency in alternative sources of power, like natural gas, it said.
Nonetheless, it said that with good planning, conservation, and favorable weather, Luzon can avoid a catastrophic power crisis this year.
However, the country still faces many issues around high power cost and supply constraints, it said.
To address these issues, the country needs to encourage more investments in a mix of energy sources to enhance energy security, and strengthen competition in the power-retail sector to improve service and bring prices down, among other essential reforms.
The WB also said the country needs to exert efforts in regaining its position as a world leader in electronics exports.
“Between 1980 and 2008, Philippine electronics exports grew exponentially, becoming the key export product in the 2000s. However, since the 2008 global financial crisis, electronics exports have not fully recovered,” it added.
Regaining the country’s position as a leading exporter of electronics products require a concerted effort to improve power cost and reliability, raise infrastructure and
human capital investment, and reduce non-tariff trade barriers, it said.
The WB noted the country has an investment gap (both physical and human capital) of around 6.8 percent of GDP as of 2014. Improvements in tax administration (i.e., efficiently collecting existing taxes) can generate about 3.8 percent of GDP in fiscal space over the medium-term to finance the investment gap, it said. The balance of 3 percent needs to come from tax policy reforms.
Tax-administration reforms include simplifying tax procedures and processes to facilitate compliance, and lifting the excessively restrictive bank secrecy laws, which make it very difficult to catch tax frauds, it said.
Globally, excluding offshore financial centers, only Switzerland and Lebanon have similar restrictive bank secrecy provisions but the former is committed to relaxing it soon, it said.
A more equitable, efficient, and simpler tax system should be the aim of any tax policy reform.
The WB recommended reforms such as the rationalization of tax incentives by making them more targeted, transparent, performance-based, and temporary.
“This should include the timely release of a tax expenditure statement, which enumerates all existing tax incentives and who benefits from them. Second, tax rates and valuations which have not kept up with inflation should be adjusted to improve the equity of the tax system,” he said.