Growth Indicators: Reason For Optimism And Pessimism

There seems to be a lot of reasons for optimism on the part of the Aquino government about the Philippine economic outlook for 2014.

1. The Philippine economy grew by 7.2 percent last year, despite the devastation caused by super typhoon Haiyan (local name: Yolanda) and the Bohol earthquake.

2. Imports increased by 21.8 percent to $5.757 billion in January2014 compared to January 2103. Causing much optimism is the increase in imports of raw materials for the production of electronic components and garments, steel, metal and chemical products.

The National Economic Development Authority (NEDA) sees this as an indication that an increase in the exports of electronic components and garments would soon follow in the coming months.

Also, the NEDA believes that the increase in imports of the latter – steel, metal and chemical products– indicate that the boom in construction, a major contributor the GDP growth last year, would continue. To further spur infrastructure construction is the rebuilding of areas devastated by supertyphoon Haiyan.

3. Exports also grew by 9.3 percent in January (also compared to the same period last year). Leading the growth in exports are electronic components and products with total receipts of $1.793 billion for a 22.1 percent increase. Other exports of semi-manufactures earned $600.25 million, up by 99.5 percent. This, according to the NEDA, made up for the reduction in export earnings from traditional exports such as agricultural raw materials, minerals, forest products (logging) and petroleum.

However, these rosy economic indicators could also be a cause for pessimism.

1. The increase in imports also resulted in an increase in the country’s trade deficit to $1.376 billion in January, up 92 percent from the same period in 2013. One could see the reason why with the above figures: imports grew faster, with a 21.8 percent increase, than exports, with a 9.3 percent increase. The actual figures are even more staggering: total imports amounting to $ 5.757 billion vs. export earnings of $1.793 billion. This is the problem with the country’s trade position: to be able to produce and export more low value-added electronic components and products (because the country merely puts these components together and not actually manufacture them), the country has to import more high value capital goods and raw materials. Add to this the fact that the bulk of the country’s exports are produced by multinational companies and their subsidiaries, which could freely repatriate their profits and practice transfer-pricing (the overvaluation of imports from mother companies to siphon back profits).

This is why remittances of overseas Filipinos and deployed overseas Filipino workers contribute more to the country’s dollar earnings and foreign exchange reserves than exports. And the country’s dollar reserves are essential to the stability of the value of the Philippine peso. Moreover, with the worsening unemployment situation, remittances are the main fuel of domestic consumption. Who do you think is the main target market of the numerous condominiums being constructed around the metropolis?

2. The economic outlook in the country’s main export destinations is grim. Japan accounted for 26.3 percent or $1.150 billion of the country’s export earnings; the US is second at 13.8 percent, valued at $605.43 million. All the others registered single digit percentages such as China 9.9 percent, Singapore 8.8 percent, Hong Kong 7.5 percent, among others.

Japan has been pump priming its economy since the late1980s. The result is that public debt grew to $10.46 trillion in 2013. According to an article Japanese Debt written by Ben McLannahan, published by Business World, current Japanese government debt issuances (treasury bonds) has amounted to $1.78 trillion. These government bonds were bought by Japanese commercial banks, which are loaded with deposits of companies and households who are unwilling to loan and spend because of the sluggish economy. The catch is that the Japanese central bank buys back a lot of the bonds it issues to the market to keep bond yields low in an attempt to stimulate economic recovery. The question is: How long could the Japanese government continue with its combination of a fiscal stimulus program (pump priming) and monetary policy (quantitative easing through the buying back of bonds) to stimulate economic growth, which sinks the government deeper into debt?

The US is faring no better. It is now in the process of tapering its quantitative easing efforts as it has already printed and pumped into the economy trillions of dollars and, instead of spurring economic growth, it just brought down the value of the dollar making imports more expensive. The US national debt amounted to $9.2 trillion in 2008 and is projected to reach $20 trillion by the end of the decade. Already, the US Federal government experienced its third longest shutdown in October of 2013. The unemployment situation in the US is not expected to ease this year. There are economists who are predicting that a crash much worse than 1929 is in the offing.

The tapering of US quantitative easing efforts is already being felt in the Philippines and other countries such as Thailand in the reduction in the inflows of portfolio investments (“hot money”). A Philippine Star January 18, 2014 report quoted Philippine Central Bank Governor Amando M. Tetangco Jr. warning of “more capital flight.” And the country could hardly hope for an increase in exports to the US and a significant growth in remittances of overseas Filipinos in America because it is plunging deeper into crisis.

3. While the country’s reconstruction efforts could further spur the local construction industry, it comes with a price. The pledges from foreign governments and banks are not all free. Already, the Aquino government has accepted the loan offers of the World Bank and the Asian Development Bank amounting to $ 1 billion for the reconstruction of typhoon devastated areas. “The problem comes … in 10 years’ time, when the loan has to be repaid,” said Tim Jones, a senior policy officer for the Jubilee Debt Campaign.

4. Unemployment and poverty in the Philippines is worsening. And the Aquino government’s declared commitment to “inclusive growth” has remained in press releases.

The Philippines is not immune to the world economic crisis as the Aquino government would want to make us believe when it brags about the resilience of the economy and points to GDP growth amid the crisis and devastation brought about by disasters. The country is still dependent on trade especially with advanced capitalist countries, which are now reeling from the crisis, on the export of labor and remittances of Filipinos from these countries, on foreign direct, as well as portfolio investments from the same countries, on tourism receipts, and foreign loans.

What we are experiencing right now is temporary relief because those who benefited from the quantitative easing sought more profitable investments in so-called “emerging economies” and a lot of multinational companies are trying to cut on labor costs by either transferring some labor-intensive production processes to countries with cheap labor such as the Philippines or outsource some functions to BPO companies. They also dump more imported goods here providing an illusion of abundance; the US dollar is weakening thereby making it appear that the Philippine peso is appreciating; and more overseas Filipinos try to send more money to their relatives here because of the rising costs and worsening unemployment giving the illusion that consumption is robust. Local banks are also trying to cash in on the remittances with the frenetic construction and selling of condominiums. However, governments all around the world are pressing down wages thereby further constricting the already finite market of consumers. Soon the full impact of the crisis will catch up with us because, in the final analysis, when advanced capitalist countries sneeze, we catch the flu. (bulatlat.com)

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