This is re-posted opinion piece.
There are heavy dark clouds in the economic horizon that should worry any rational, responsible, and smart leader. Yet, top policy makers — President Aquino III, National Economic and Development Authority Director-General Cayetano Paderanga Jr., Trade and Industry Secretary Gregory Domingo, and Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco, Jr. — seem unperturbed. They do not see the need to revise the GDP, trade, and overseas remittances targets despite the doom and gloom brought about by the crisis in Europe, the trouble in Japan, and the slowdown of the US economy.
President Aquino III expressed confidence that the recent economic developments in the US won’t have any negative effect on the investment climate in the Philippines. “I think we will stand and fall on our merits…. The value of investments in this country will not change with what is transpiring in America,” Aquino added. Brave words.
At a hearing of the Senate finance committee, the country’s economic managers belittled the downgrade of the US credit rating by Standard and Poor’s. “The impact on GDP is relatively minor — minus point 1 percent although the impact on sectors is more like minus half a percent,” said NEDA Director-General Paderanga. Equally brave words.
In the same hearing, BSP Governor Tetangco likewise downplayed the effects of the US downgrade by Standard and Poor’s, saying there would be, at most, “a knee jerk reaction in terms of interest rates.”
In the face of declining exports — a 10.2% drop in June, following a 3.1% contraction in May — the Trade department chose to stick to its official 10% export growth for the full year. Total exports grew by 4.1% from January to June this year. The agency said it will keep its export growth target for the year as it expects Japanese reconstruction and stronger manufacturing recovery to drive Philippine economy in the second semester.
But the slowdown in exports is serious. The National Statistics Office reported that electronics exports, which accounted for more than 50% of total exports, contracted 23.9% in June from a year ago.
The slowdown in exports of goods is accompanied by decelerating peso value of remittances. The January-to-June total remittances grew 6.3% in dollar terms. How can one explain the continuing rise in remittances in the face of a weak world economy and continuing political unrest in the Middle East and North African countries? Part of the increase is due to greater efficiency in the collection of remittances through official channels.
Another reason for the increase in remittances is the peso appreciation. Families of OFWs live on peso budget. With the peso appreciating, the OFWs just have to send more dollars. But how do they manage to send more dollars? They either withdraw from their savings abroad or borrow money. Both are not sustainable.
As I said before, what is relevant is the value of remittances in pesos. With a 4.4% appreciation of the currency from January to June, the peso value of the OFW remittances has increased by only 1.9%. It could have been worse had the peso appreciated much faster, say between 5 and 10%.
A 1.9% increase in OFW remittances is insignificant compared to the levels when overseas remittances were growing at double-digit rates and were accompanied by peso depreciation. In the past, remittances accounted for about 10 to 12 % of GDP.
What makes the slowing overseas remittances more serious is the rising uncertainty on future work abroad. This is true for those who lost their jobs, those who are currently working, and those who are planning to join the ranks of Filipino diaspora.
Those who lost their jobs are either coming home or staying put while looking for alternative employment. Those who have work are uncertain whether their contracts will be renewed. And those who are planning to work abroad are thinking twice before leaving the country.
With high and persistent unemployment in Europe and the US, and job loss as a result of political crisis in the Middle East and North African countries, OFWs are warier and thus more careful with their spending. Families of OFWs may choose to spend less, and save more. And since households of OFW workers have high marginal propensity to consume, their spending has a high multiplier effect.
In effect, slower consumer spending by OFW households owing to smaller remittances in peso terms and rising uncertainty would mean a significant cut in aggregate demand.
Slower remittances and rising uncertainty will also effect private investment. Investing in real estate requires a lot of confidence on future employment. But with stubbornly high joblessness in host countries and shifting policy on foreign workers, job security becomes iffy. This will affect consumer investment in low and middle-income housing.
Weak exports of goods and raw labor in an uncertain world would slow aggregate demand and thus growth, the optimism of our national leader and economic managers notwithstanding.
But that’s not all. The slowing aggregate demand as a result of feeble exports and decelerating remittances, both consequences of a weak and stalling world economy, is exacerbated by self-inflicted domestic policy failure: serious government underspending. For the first half of the year alone, actual government spending, net of interest payments, was P120 billion below planned spending. That’s a lot of forgone economic benefits and job opportunities.
The confluence of these factors — slower exports, lower spending by households of OFWs due to contracting peso remittances and rising uncertainty, and serious government underspending — will categorically affect growth, employment, poverty and hunger incidence. To say otherwise is irresponsible. Citizens deserve accurate information.
To policy makers, heed these words from Ralph Waldo Emerson: “Great men, great nations, have not been boasters and buffoons, but perceivers of the terror of life, and have manned themselves to face it.”
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By: Benjamin E. Diokno – Core
Source: Business World,
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