Monday, 7 June 2010

Hitting the ground running

Manila Bulletin

It is very important that President-elect Noynoy Aquino is able to hit the ground running on June 30, 2010. He is fortunate that he is facing a more favorable economic environment than his two immediate predecessors in 1998 and 2001, respectively. As I correctly forecasted early this year, a GDP growth of 7.3% in the first quarter was achieved. The prospects for April to June 2010 are even brighter since these months coincided with the peak of election-related spending and the summer months.

The world is recovering from the Great Recession of the last two years. The recovery is especially robust among the emerging markets to which the Philippines belongs. In both the advanced economies and the emerging markets, economic indicators are generally improving. Countries like China, India and Indonesia with which the Philippines is increasing trade and investment relations are experiencing a V-shaped recovery, i.e. they are already growing at GDP rates that are close to or even higher than their pre-crisis levels. As reported by the Economist Intelligence Unit, China's economy expanded by almost 12% year on year in the first quarter of 2010, and Singapore's by a whopping 12%. World trade, which is recovering rapidly as GDP and manufacturing growth pick up, rose by an unprecedented 5.3% in the three months to January 2010 compared with the previous three-month period. It is no wonder that Philippine exports have expanded at 43% in the first quarter of this year.

Thanks to the ongoing global economic recovery, the new Administration can follow the double-track strategy to attaining the 7% to 9% growth in GDP that the country needs to effectively combat mass poverty, which is one of the worst in East Asia. The first track--which is a strong domestic market--is what enabled the Philippines to avoid a recession in 2009, together with its two giant neighbors, Indonesia and Vietnam. Despite exports declining by more than 30% in 2009, GDP managed to grow because of domestic consumption, fueled especially by the remittances of overseas Filipino workers and government pump priming. Growth in the first semester of 2010 can be as high as 7% because in addition to these two sources of mass purchasing power, there was the added stimulus from the billions of pesos spent by the candidates for the May 10 elections.

The domestic market alone, however, cannot sustain high growth of 7% or more. The export sector must be the second track. In fact, among the policy pronouncements of Aquino during the campaign trail, there was the emphasis on promoting industries with the greatest potential for growth and where the Philippines has a competitive advantage. Among these are sectors that can grow rapidly only if the global economy is expanding robustly: agribusiness, business process outsourcing, creative industries, socially responsible mining, tourism and retirement. Most forecasters expect the world economy to grow at 4.0 % or more in 2010 from a decline of -0.9% in 2009. In 2011, global growth can continue at more or less the same level under the most optimistic assumptions about the advanced economies like the United States. There are a few economists, however, who disagree with Larry Summers, the senior economic adviser of President Obama, who recently asserted that the US was approaching "escape velocity". The Economist Intelligence Unit points out that there is still the possibility of a slowdown in 2011 in the US economy because inventory re-building and fiscal and monetary stimulus continue to be the main drivers of growth. None of these are sustainable over the medium term.

It would be wise for the economic managers of the next Aquino Administration to be ready with contingency measures should 2011 prove to be more challenging, with double-dip recessions inflicting advanced economies like the US, Germany, Japan and other members of the European Union (especially the troubled economies of Greece, Spain, Italy, Portugal and Ireland). These countries together still account for more than 50% of our international trade. Any major slowdown in 2011 of these OECD countries can once again dampen Philippine exports. Although the World Bank and other private forecasters present more optimistic scenarios for the US and the advanced countries, I prefer to be on the conservative side (for a change) and assign greater credibility to the pessimists. Among these is the Economist Intelligence Unit which expects the US to slowdown from 2.8% growth in 2010 to 1.6% in 2011. Reasons cited include consumers continuing to feel the pinch from high unemployment and the loss of wealth associated with the financial crisis. The recent uptick in consumer spending in the US may be temporary. There are greater pressures for US consumers to continue increasing their savings rate to double-digit levels. We cannot expect to see a sustained recovery in housing prices in the immediate future. To avoid a "Greek tragedy", the US authorities will have to put a stop to the pump priming, with fiscal policy turning neutral in mid-2010 and becoming contractionary some time in 2011.

The EIU is even more pessimistic about the Japanese economy. Despite continuing fiscal stimulus, deflation will discourage consumption and investment. There will be some relief in exports because of the strong growth of China but a very sluggish domestic market will keep GDP growth in 2010 at a low of 1.5%, then slowing to 1.1% in 2011. Over the long-term, continuing slow growth will lead to what is known as the L-curve, mainly due to the depressing impact of an aging population on local demand. Japan's reluctance to accept significant numbers of foreign workers combined with a very low fertility rate may lead to another lost decade similar to what happened in the 1990s. With Japanese investors very bearish about the Philippines and its economy growing at a low pace, the new Administration cannot expect Japan to be an engine of growth for the Asia Pacific region. This gives us more reason to intensify our efforts to capitalize on the opportunities presented by the AFTA plus China free trade agreements.

The outlook in the Euro area is no brighter, according to EIU. Growth prospects remain weak and unemployment has reached an average of 10% for the region, with Spain reaching 20%. The so-called PIIGS countries will experience close to zero growth as they are forced to significantly reduce expenditures on social security and infrastructure. Investment climate will deteriorate further as tensions rise with the mass protests against the austerity measures. In Greece, some deaths have already resulted from these mass protests. The Greek debt crisis now overshadows the entire euro zone, creating a great deal of uncertainty about the creditworthiness of other European countries and the stability of the euro which is rapidly depreciating.

Given this rather pessimistic scenario for the OECD countries, our traditional engines of growth in the last twenty years, the leaders in the next government should assign a very high priority to intensify our trade and investment relations with the so-called emerging markets. The leading emerging markets are China, India, Indonesia, Brazil and Mexico. They and developing countries in general are expected to grow at an average of 6.0% in 2010 and 6.1 in 2011, with China registering 10% and 9%, respectively in 2010 and 2011. There is no doubt that Asia is spearheading the dynamic recovery of the emerging markets, thanks to timely and targeted stimulus programs and to the fact that most of these economies were caught by the global crisis in relatively good shape. Exports are surging, albeit from low bases. The problem of China contrasts with that of the advanced countries: there is fear that its economy is already overheating.

For these reasons, I suggest that the first foreign trips that President-Elect Aquino should make should be to the emerging markets of East Asia: China, Indonesia, Vietnam and South Korea. These are the countries with whom we can intensify with immediate results our trade and investment relations. A lot more capital and technology can flow from China and South Korea to the Philippines. There can be more rapid growth of trade with Indonesia and Vietnam. So, there is no time to lose. Hit the ground running. For comments, my email address is

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