This is a re-posted opinion piece.
Even before the world economy has recovered, another perfect economic storm is brewing. The US economy is slowing; the 17-nation Euro region is hobbled by severe debt crisis, even as its biggest and most stable country, Germany, is teetering on a recession; Japan is facing its third “lost decade” as it tries to rise from its triple tragedy; and China is trying to engineer a “soft landing.”
Most analysts are anticipating that the next two years will be difficult. In a recent forum, World Bank President Robert Zoellick warned that world markets have entered a “new danger zone” and that investors had lost confidence in the economic leadership of several key countries.
When Fed Chairman Ben Bernanke announced that the near-zero interest rates in the US will be kept unchanged for another two years, analysts read this as a sign that the US economy will remain weak for the same period.
Some also read this policy announcement as an admission that fiscal expansion as a policy tool will not be available until after the next presidential elections in 2012. The current political gridlock won’t allow fiscal expansion to stimulate the stagnant economy. Fiscal austerity has overtaken fiscal stimulative spending.
The lower-than-expected contraction of the Japanese economy — 1.3% GDP growth in the April-June quarter against a consensus forecast of 2.6% — provided a glimmer of optimism for the struggling economy. But Japan remains in recession — as it has been in and out of one for more than two decades now. However, with the strengthening yen — some predict the yen might overshoot to 60 yen per US dollar — the Japanese economy will be in for more hard times in the years ahead.
Economist Nouriel Roubini, the co-founder and chairman of New York-based Roubini Global Economics LLC, predicts trouble for China down the road. “China is now relying increasingly not just on net exports but on fixed investment” which has climbed to about 50% of GDP,” he said. “Down the line, you are going to have two problems: a massive non-performing loan problem in the banking system and a massive amount of overcapacity is going to lead to a hard landing.”
Right now, because of China’s political transition next year, there is pressure on the political leadership to keep growth going at 7-to-8% range. But after next year, China has “to reduce fixed investment and savings and increase consumption. Otherwise after 2013, there will be a hard landing,” Roubini said.
Meanwhile, the German economy barely avoided zero growth in the second quarter. A weak Germany means the Euro zone debt crisis will be deep and prolonged. It has a direct impact on Philippine exports since Germany is one of the top 10 export destinations, the fifth among our top trading partners ( after Japan, US, Singapore, and South Korea).
WEAK POLICY RESPONSE
With a weak and stagnating world economy, what has been the response of Philippine authorities? Both disappointing and encouraging.
The immediate threat to the Philippine economy is the peso appreciation (as the dollar weakens). A strong peso adversely affects the lives of families of OFWs, exporters and workers in the sector, owners of import-substituting firms and their workers, BPO companies and their workers. It makes job creation doubly difficult for a labor-surplus economy. Every time we import goods that we can produce at home, we create jobs in foreign lands and increase joblessness at home.
The response of our monetary authorities was disappointing. When Fed Chairman Bernanke announced that the near-zero interest rates will be maintained for at least through mid-2013, that was a bold policy move. Our monetary authorities could have done a similar verbal intervention; but they chose to keep quiet.
At this time, the threat of inflation is not the enemy, it is growth and job creation. With the world economy slowing, the price of oil will fall to below $90 per barrel. That will help curb inflation. Falling oil prices combined with the appreciating peso will result in less expensive oil product prices in the pump.
The domestic economy is sputtering. As a result, it will be more difficult for producers to raise prices.
With the peso value of OFW remittances decelerating, and with households of OFWs running scared because of limited job opportunities abroad, household consumption is likely to decelerate. Another reason why inflation is likely to be tame.
With waning confidence of some developed countries in Europe and the US, the inflow of hot money into transition economies is likely to increase. Another verbal intervention would have been appropriate. For example, the BSP could have announced that it is seriously considering putting some measures to control the inflow of portfolio investment, as some countries have done.
Regretfully, BSP has done the exact opposite: it stated that foreign exchange controls are not in the policy agenda. In a very clear message, monetary authorities told the footloose fund managers: Welcome to the Philippines, make a lot of money and wreak havoc on its weak economy.
The presidential spokesman joined the fray and announced that exchange controls will be considered only if done in a coordinated way. But precisely other countries are doing it while our monetary authorities stand idly by. By doing so, the Philippines will now be inundated with hot money diverted from countries that have revealed their preference to discourage them. By not acting now, Philippine authorities may have to be faced with more serious problems later.
The Philippine monetary authorities appear to be caught in a time warp. Its policies are addressed to another era — when the economy was foreign-exchange scarce and when inflation was horrible.
LEDAC-SPONSORED MEASURES
It is encouraging that the Legislative-Executive Development Advisory Council (LEDAC) was convened this week, the second in more than a year of Mr. Aquino’s presidency. However, the list of measures that emerged from the meeting was a downer.
Except for two or three measures, the priority bills do not address the more pressing national problems. Some are of doubtful value. For example, I don’t find the proposal to amend the People’s Television Network-Channel 4 charter to ensure the state-owned network’s long-term viability as a priority.
In the scheme of things, it will not have an impact on the lives of the ordinary men on the street, except it will probably burden them with additional taxes. A government that is committed to openness and accountability has no business owning a TV station. It has ans extremely limited audience anyway. Why throw good money after bad?
The Responsible Parenthood, Reproductive Health, and Population and Development Bill, even in its modified version, is a good one. What is important is that the Aquino III administration supports it and is willing to fund and implement it.
Another good measure is the restructuring of excise taxes on alcohol and tobacco products. It addresses a major weakness of the economy: fiscal fragility. Contrary to the contrived picture that the Philippine fiscal house is order, the brutal reality is that its fiscal space has been limited, is limited, and will continue to be limited unless serious tax reform is put in place. I can see that Mr. Aquino is slowly inching away from his “no-new-tax” policy. Bravo!
But the higher sin tax measure could be improved upon: make the tax on alcohol and tobacco ad valorem, and define in the law what constitutes transfer pricing.
The lower-than-expected budget deficit during the first half of the year is largely due to underspending. But government underspending in the face of rising unemployment and underemployment and deteriorating public infrastructure is irrational behavior.
Actual revenue collection was below planned levels. Both the Bureau of Internal Revenue and the Bureau of Customs failed to collect what they commit to collect this year. The BIR will be challenged by the deteriorating profit of major firms due to slowing economy and base effects, while BOC’s woes will continue to mount as the price of crude oil falls and peso appreciates in value.
One of the proposed measures have the effect of further eroding the limited tax base: the amendments to Presidential Decree 269 (Rural Electrification Program) whereby cooperatives will get permanent tax exemptions.
There is a major omission. The list of priority legislative measures does not include the rationalization of tax incentives. While the measure may have no immediate revenue effect, it may lead to higher revenues in the future, improve fairness of the tax system, and lead to an investment pattern that is more attuned with the labor-surplus nature of the Philippine economy.
Serious problems require bold and innovative solutions. Sadly, both the prescribed monetary and fiscal fixes are weak and unresponsive.
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By: Benjamin E. Diokno – Core
Source: Business World, Aug. 17, 2011
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