Saturday, 13 February 2010

Keep the reforms moving

Manila Times

THE growth in exports for the second month in a row augurs well for the Philippine economy, as it slowly recovers from the effects of the worst global slump in decades. Our economy luckily escaped experiencing a recession. This has placed us among the positively rated dozen of countries (mostly Asian) that experts see as the economies that will lead the world into full recovery.

This week, the National Statistics Office (NSO) announced that December exports grew by double digits, up from the single digit increase the month before.

The December growth was the fastest in nearly four years, led by the double-digit expansion in electronics shipments abroad.

The strong showing by the electronics sector, which accounts for at least 60 percent of Philippine merchandise sales abroad, validates the improvement in the book-to-bill ratio, which had shown earlier that orders outpaced deliveries as early as November last year.

Besides electronics, transport equipment—particularly ignition wiring sets—also surged by double digits last December, pointing to the possible recovery in the Philippines’ auto parts industry.

Indeed, the government had announced that imports last November woke up from a 14-month slide, indicating that exports going forward may turn for the better.

Another sign of a possible recovery in external trade is the improvement in the US’ purchases of Philippine-made goods. The US after all is our biggest export market.

Industry sector also positive

The rebound in exports also coincides with the positive showing of the industry sector. The NSO earlier said that factory output grew last November, rousing from a 12-month contraction.
Similarly, the average capacity utilization of local factories picked up, an indication that manufacturers are switching on previously idled machinery.

Industries responsible for the up tick in factory output were miscellaneous manufactures, basic metals, tobacco products, electrical machinery, petroleum products, non-metallic mineral products, rubber and plastic products and transport equipment.

The stock market welcomed the December exports figure, breaking several sessions of losses stemming from Europe’s fiscal woes.

But it remains to be seen whether the recovery in the export sector would be sustained, and if so, whether it would be faster than earlier expected.

Before the release of the December exports figures, many pundits were expecting domestic factors—remittance-led household and election-related spending—to prop up the Philippine economy in the first half.

This explains the Bangko Sentral ng Pilipinas’ (BSP) reluctance to pursue an exit from the liquidity enhancing measures it put in place at the height of the global financial turmoil.

So far, the BSP has wound up its generous rediscounting facility. Many observers expect a hike in bank reserve requirements to follow, especially after the surprise inflation last month showing price increases averaged below the central bank’s forecast.

Monetary authorities, however, are signaling that any further step to terminate its package of crisis measures may have to wait, pending the turnout of external developments such as the fiscal crisis of a growing number of European economies.

Caution should prevail

We agree that caution should prevail, as the global recovery is clearly not yet firmly underway.
The Arroyo administration’s passage of the 2010 national budget—with provisions for continued pump priming—indicates the government’s readiness to keep up spending despite the bullish outlook for personal consumption expenditures.

But fiscal authorities have to step up borrowings amid the uncertain outlook for tax revenues, especially since the election season would discourage new tax measures.

The El Niño dry spell obviously would dampen this year’s farm output, which accounts for a fifth of the Philippine economy. Likewise, the near capacity situation in the power sector would temper economic expansion.

In this regard, the government should complete the reforms mandated under the Electric Power Industry Reform Act, particularly the state’s divestment from the sector, to allow the free play of market forces, which is key to jump-starting private investment in additional capacity.

Economic recovery this year—the return to something like half of the 2006-2007 record-setting growth we enjoyed in 2006 and 2007—is far from guaranteed. A lot depends on the continued recuperation of the economies of our rich customer-countries.

The completion of our own pending reforms and initiatives is also just as essential. This in turn requires their insulation from the oncoming onslaught of partisan electoral activity.

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