The Market Monitor Minding the Nation's Business
The government’s economic officials have admitted that the effect of massive underspending under the Aquino administration had a lot to do with the disappointing 5.2-percent growth in the first quarter, despite earlier claims this year that it was ramping up its expenditures through frontloading.
Frontloading is when the government bunches up the release of the budget in the initial part of the year, which economists believe would have the effect of stimulating growth.
But first-quarter economic figures did not support what the government has been proclaiming; growth slowed down to a three-year low, and analysts blamed this on poor government spending and a reduction in exports.
Gross domestic product growth was the slowest since the three months through December 2011.
The growth during the period was lower than the 5.6-percent growth a year ago, but more important,
the economy contracted 0.3 percent, compared to the previous quarter.
The economy maintained its growth due mainly to the remittances of an estimated 10 million Filipinos working overseas who contribute something like $2 billion each month to the economy, and the business process outsourcing (BPO) boom that is keeping private construction healthy while immensely contributing to reducing the employment problem, but only among English-proficient Filipinos.
Belatedly, the government has been harping on developing the iron and steel industry, the key ingredient of industrialization, but considering that the Aquino administration steps down next year, a concrete policy to back up the assessment may not take place.
Deputy Director General Ronaldo Tungpalan of the National Economic and Development Authority (Neda) said the development of the iron and steel industry would be a critical component of infrastructure, which, in turn, is necessary to sustain growth in the economy.
From iron and steel factories would rise the different manufacturers of consumer goods and from these factories, jobs are generated.
Also the component that has been sorely lacking in the country’s economic development is support for the agricultural sector, which provides livelihood for majority of the country’s population.
President Aquino, in his recent visit to Japan, tried to stoke the interest of Japanese businessmen on investing in the country mainly due to the Asean integration that is expected to start by the end of the year.
The integration plan initially targeted the start of this year, but a host of Asean members have yet to comply with the required liberalization steps for regional integration.
The absence of basic industries in the Philippines, like a strong iron and steel industry, renders the country handicapped when the Asean economic bloc starts and foreign investors start investing elsewhere in the integrated region where there is a strong business base.
During his term, the late President Ferdinand Marcos embarked on a program to develop the local steel industry through the National Steel Corp. (NSC), which has one of the biggest steel factories in the region in Iligan City in Mindanao.
In 1994, during the term of President Fidel V. Ramos, NSC was sold to Malaysia’s Wing Tiek, an undercapitalized Malaysian firm that borrowed heavily from local banks. The Malaysians subsequently left and the NSC has since become a nonfactor for economic development.
Nothing has been done under the present Aquino administration to address the basic defects of the economy rather.
Rather, it focused on the high-profile Public-Private Partnership (PPP) programs that were great on paper, but never took off.
Major catalyst
The Neda is now saying that the iron and steel industry is a major catalyst for national development and a crucial determinant of growth and competitiveness of the country.
The realization seems to be too late in the game, even as trade groups and academe have all admitted that the lack of jobs and the absence of basic industries that support the building of infrastructures have been hurdles to sustainable economic growth since the start of Aquino’s term.
The slow growth in the first quarter also means that Aquino’s “prudent” growth target of 7 percent to 8 percent this year is now unreachable. Agriculture was again the culprit, with its weak 1.6-percent growth during the period.
From the previous quarter, growth of the entire agriculture sector also contracted to 1.7 percent from a growth of 5.9 percent in the previous quarter. Industry also shrank from a 3.5-percent growth to -1 percent.
Services sustained its growth at 1.5 percent in the first quarter of 2015 from 1.4 percent in the last quarter of 2014.
Underspending or the failure of the Aquino administration to efficiently make use of the yearly budget totaled P529 billion from 2011 to 2014 based on former Budget Secretary Benjamin Diokno’s estimate.
The underspending will have a long-term consequences that would transcend the present administration, he said.
Foreign direct investments (FDI) have also slowed significantly until February.
Diokno said not only is the Philippines not attracting as much FDI as its Asean-6 peers (Indonesia, Malaysia, Singapore, Thailand and Vietnam), the flow of FDI has hit a bump in January this year. Net inflows of FDI reached $263 million in January, lower by 71 percent year-on-year.
Merchandise exports also fell from December 2014 to February 2015.
The decline in exports maybe attributed to weak world economy and the rising uncompetitiveness of Philippine exports, primarily because of high power and transport costs.
He said agricultural outputs face the risk of a prolonged and more severe El Niño.
Reduced farm activities means more labor will be released in the agricultural sector, which will then join the work force in the industry and the services sectors that will result in higher overall unemployment or lower real wages or both.
Diokno said lower oil prices will also mean shrinking resources mainly because the government relies heavily on taxes imposed on fuel.
In planning the 2005 budget, the economic managers assumed that the Dubai Crude Oil price would be from $90 to $110.
As a result, the study showed the Development Budget Coordination Committee (DBCC) has cut the government revenue target by P62 billion, from P2.337 trillion to P2.275 trillion.
The revenue target for the Bureau of Internal Revenue was cut by P50 billion from P1.72 trillion to P1.76 trillion, while the revenue target for the Bureau of Customs was cut by P20 billion, from P456 billion to P436.5 billion.
Non-tax revenues were adjusted upward by P8 billion, government figures showed.
Growth in the first quarter of 2015 still was mainly consumer spending reinforced by fixed capital, particularly durable equipment, and government spending, according to the Philippine Statistics Authority (PSA) which means that it is still remittances from Overseas Filipino Workers (OFW).
The figures showed, though, that growth in net primary income which included remittances grew a slow 2.7 percent from 11.1 percent in the first quarter of 2014.
Gross national income (GNI) grew by 4.7 percent from 6.6 percent in the first quarter of 2014. Luis Leoncio