By Luis Leoncio
The sound fiscal reforms that had improved the economic stature of the Philippines started during the term of President Gloria Macapagal-Arroyo, Moody’s Investors Service said in its latest report on the country.
The report also reflected the worries of Filipino economists about government underspending limiting the country’s growth prospects.
Last week, noted economist Dr. Bernardo M. Villegas said that, had not President Aquino and his economic team resorted to underspending, the economy could have grown from 8 percent to 10 percent, which was what was required to eliminate poverty in the country. Still, the report expressed optimism the country could recover from the setback over time.
Mr. Aquino and his team had been saying that reforms initiated under this administration had led to the country’s obtaining investment-grade ratings from key credit-rating agencies Moody’s, Fitch Ratings and Standard and Poor’s.
But Moody’s acknowledged it was the Arroyo administration that started the institutional reforms in the country.
“Many of these changes resulted from a public financial-management reform drive that was first mounted during the administration of President Gloria Macapagal-Arroyo in the mid-2000s,” Moody’s said.
The main challenge facing Philippines policy makers is sustaining the positive trajectory of institutional quality through the current political cycle, Moody’s said, citing the national elections set next year.
Among the reforms Moody’s cited as having been initiated during Mrs. Arroyo’s term were “institutional improvements,” including “performance-informed” budgeting that has improved expenditure oversight; various tax-administration measures that have boosted compliance; and enhanced procurement processes that have led to cost savings.
But it noted that in 2014, the Aquino administration incorporated elements of International Public Sector Accounting Standards in its fiscal reporting, notably shifting to an accrual basis of accounting from a cash basis previously.
Moody’s also credited Aquino’s team with implementing a treasury single account to centralize control over its cash resources.
But it said the enactment of laws, such as the Public Financial Management bill, the pending Tax Incentive Management and Transparency Act, or the amendments to the Build-Operate-Transfer Law currently being considered by Congress, would help institutionalize many of these administrative reforms.
“Progress on reform has continued despite increased political noise as campaigning for next year’s presidential election has effectively started,” Moody’s said. “Political noise has increased ahead of general elections next year, but we do not expect a reversal in the trend improvement in institutional strength. Reform momentum has been largely sustained, leading to improved assessments of competitiveness and governance.”
Echoing the worries expressed by Filipino economists about government underspending limiting growth prospects, Moody’s said: “Bottlenecks in fiscal expenditure have continued to weigh on growth and could
threaten the government’s capacity to meet its goal of increasing infrastructure spending to at least 5 percent of gross domestic product (GDP) by 2016.”
It noted that through the first half of 2015, “the Philippine economy has continued to perform in line with trends already apparent at the time of our upgrade in December 2014.”
These trends, Moody’s said, included the persistence of fiscal underspending relative to budget, the relative strength of the private sector, and faltering external demand.
“Fiscal underspending weighed on overall growth earlier in the year, but should provide greater support to the economy in coming quarters,” it said.
Moody’s said the government-related components of GDP—government consumption and public construction, which include infrastructure development—contracted 2 percent in the first quarter compared with last year’s figure.
“Public-private partnership (PPP) program for infrastructure development has started to gather momentum following a slow start during the first half of the Aquino administration,” it said.
It noted that the resiliency of the economy was coming more from the private sector rather than government policies.
“While the fiscal impulse has been uneven, the private sector’s contribution to growth has been stable, largely due to robust household consumption, which has been aided in recent quarters by lower food and fuel prices, and despite the negative contribution from net exports,” it said.
“Private investment—as defined by gross fixed capital formation excluding public construction—has also remained buoyant,” it added.
Moody’s added that remittance inflows have continued to support private consumption despite a slowing of receipts from the Middle East, whose petroleum and service industries rely to a large extent on Filipino labor.
“In the first seven months of the year, overseas Filipinos’ cash remittances grew 4.8 percent year-on-year, slightly below the 5.9-percent increase recorded for the full year in 2014. Over the same period, the growth in remittances from the Middle East, which accounts for roughly one-fifth of all remittances, slowed to 8 percent, as compared with the 22.7 percent rise last year,” it said.
Moody’s noted that in contrast, remittances from the United States, the largest source of remittances, have steadily increased in line with a healthier economy.