The latest GDP growth of 6.5 percent in the second quarter has met the lower end of government target. This data records 26 quarters of growth performance. Furthermore, this rate is still the best among the larger Asean economies besting Vietnam’s 6.2-percent growth in the same period. We know that successive growth is not enough, it has to be successively high in order for it to impact significantly in every aspect of the economy. Nonetheless, the average growth in the last six years have now topped 6 percent better than our generational average of just about 4 percent. So the next question is how will this growth be sustained at its current levels?
This is an important question because some critical balances have tilted significantly over the side that could signal slowing growth. These are the current account and the fiscal balances. Let us consider the fiscal balance first. While the Philippines has been regularly posting fiscal deficits, the previous administration has been able to maintain it at an average of -1.7 percent of GDP. This shows good fiscal discipline that allowed the country to finally attain an investment grade-credit rating. It is also notable that this fiscal discipline was achieved without tax reform (except the “sin” taxes). The rule of thumb in fiscal deficits is that it is alright to have them as long as they do not go beyond 3 percent of successive GDPs. However, this low deficit to GDP ratio was also achieved with government revenues relatively staying around 14 percent of GDP. In effect, government expenditures were maintained at certain levels and were not able to complete significant infrastructure projects on time. To address this, the current administration has embarked on the “Build, Build, Build” strategy of infrastructure spending. Considering the window available for deficit spending, the government has targeted to push it to the limit of 3 percent up to 2022. This is not necessarily bad as the economy will be using the deficit for investments, which eventually will be returned in the form of higher sustained growth. This is also the reason the government recognized that for it to keep deficit at 3 percent of an expanding GDP, it has to pass the tax-reform proposal.
The other deficit that is more of a concern lately is the current account. The current account records the international transactions of the economy, such as the exports and imports of goods and services (including business process outsourcing [BPOs] income and tourism receipts) and personal income including overseas Filipino workers (OFWs) remittances. For the past 12 years, the current account has produced significant surpluses coming from the strong contribution of the BPOs and the OFW remittances. In the last three years tourism has already started to contribute on a larger scale. This was possible because our trade deficit in goods (we import more goods than we export) has been relatively maintained at about $2 billion monthly. In the last two years, however, a notable jump in import of goods have been observed pushing the monthly trade in goods deficits to unprecedented highs. Comparing first half of 2015, 2016 and 2017, the deficit has increased more than four times from about $4 billion (January to June 2015) to over $13 billion in January to June 2017. This undoubtedly is putting a lot of pressure on the peso to weaken significantly. Furthermore, this is happening at a time that OFW remittance growth has stabilized to about 5 percent annually and BPO contributions have also reached their peaks. The expected revenues from tourism, likewise, have already reached their maximum as the infrastructure deficit limits further growth. It is also observable that the travel advisories against the country, particularly in Mindanao, have limited tourist inflows overall, which we estimate to be about 6.6 million this year. This means the maximum revenues from tourism will have difficulty breaching $7 billion. The current-account deficit should be able to correct itself since a weak peso would signal that Philippine exports of goods and services will relatively be cheaper compared to our neighbors and competitors in Asean, thereby attracting more buyers of our products and services.
Looking forward, these deficits should not alarm us if markets are working efficiently and are following signals of incentives correctly. The real challenge is not these two deficits—the real challenge is the deficit that governs the environment for these to become advantages to our country. This is the governance deficit. This is when governments are not able to provide the right environment for market incentives to work well. This comes out in different forms and are basically the issues where people are left to fend for themselves and government is simply missing. The weak government institutions are not able to respond to the rapidly changing environment and is not doing anything about it. This is what you see as traffic in major urban centers. This is also what you observed in the recent Uber debacle. This is why even if you change the heads of perceived corrupt agencies, they will remain corrupt. This is the more worrisome deficit and most of government are not aware of its existence.
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