Domestic factors affecting economic performance this year

In the private sector economy, economic growth is sensitive to domestic and international influences. With respect to domestic factors, what the government does or does not do could be of great consequence. Economic policy and the magnitude of government spending are manifestations of the influence of government on the economy.

Some non-economic events have economic impact. Such is the case with climate change, weather patterns, and natural calamities. Also, many political acts of government often have economic consequences.

“The private economy.” Private sector decision-makers are sensitive toward understanding the budgetary and fiscal program of expenditure of the government. They, therefore, monitor developments tied up with the budget, with prospects for taxation, with the level of spending and with the way that spending is allocated among sectors of the economy.

The same decision-makers are also keyed to the actions of the monetary authorities who can affect prices, interest rates, and credit prospects. Monetary policies also influence the country’s international trade and payments flows, including, as in the case of our unique position as a country with sizable citizens working abroad, remittances into the economy.

“Guesses, forecasts, and institutional viewpoints.” Many guesses come out from nooks and corners especially at the start of the year. Some of these are reliable but others not so. Some published reports are no more than knee-jerk reactions of people, including officials, in position to comment on events as a result of questions posed to them unexpectedly.

Possibly more reasoned are those forecasts that individual and institutional forecasters make. Multinational institutions have staff to monitor all kinds of developments and so they often come out with statements about the economy.

Here is what most forecasts and projections have said recently. The last year has not been a sterling year and the immediate one does not appear to be as bright either. The government people, notably Secretary Cayetano Paderanga of NEDA, have said that the growth rate could be around six percent per year.

Yet, many observers – think tanks, multilateral institutions (like the World Bank, ADB, and IMF), private analysts – give a forecast that is only two-thirds of what the government sees – on the average, around four percent this year. The central bank appears to take the lower forecast more seriously.

What the president does to lead.” The actions of the President Aquino are, as always, the bellwether of the pulse of the country’s political direction and they ought to signal change of some sort. The President’s signature concern has been on anti-corruption and governance issues. Many believe that improving governance improves economic performance. This is true only up to a point. But he tells us, Kung walang corrupt, walang mahirap.

His success on this front has been building up. He got the Ombudsman to resign on threat of impeachment for doing a poor job. The closing months of the year were major attacks on the former President Gloria Macapagal Arroyo for corruption and corrupt ways. And then, in blitzkrieg fashion, he mustered the numbers in the House of Representatives to impeach the Chief Justice of the Supreme Court Renato Corona.

These actions are strong and they resonate with the citizenry. This is the reason his popularity ratings continue to be high. These same actions also are noticed in the international front.

In the front burner of the nation’s attention today are the impeachment of the chief justice and the future trial of the former president. These two major events need to be resolved quickly but justly. If not handled well, these trials could render political cleavage at the nation’s heart. As a result, they inject potential uncertainty on the nation’s future.

“Fiscal management.” On the fiscal front, the country appears to have on surface performed well. The finance and expenditure branches of the government have controlled the fiscal deficit by being stern on the collection front and by holding up on public expenditures. An outcome is the reduction of major public spending programs, brought about in part by the slow decision-making of government on important public infrastructure projects.

But the short-run impact on the macroeconomic front is to give a picture of prudence and fiscal responsibility. This outcome merited good international notice. The country’s sovereign debt rating is improving. So are the country’s global scores on international indicators of economic performance. These are bringing kudos to the government.

“Peace bond mistake: Credibility of government hurt.” The fiscal managers made one major mistake. This is their action on the peace bonds that were sold originally as tax-free investment instruments and then reversed as ordinary investment instruments subject to tax. This hurts the credibility of the republic!

By withdrawing the tax exemption privilege of the peace bond before retiring them, the fiscal authorities broke a bond of sanctity of contracts in finance. This action punished bondholders who bought the investment instrument in earnest. The tax exemption of the peace bond might have been wrong in the first place. Punishing the bondholders – and not those who designed it – hurts the wrong parties and is poor signal to investors.

“What the president does not do.” President Aquino has been largely a passive president except for the governance issue. It is far more important to correct the nation’s gaps in economic policies when they are perceived to be stumbling blocks to progress. In respect of two major areas of economic reform, the president has been largely a muted voice.

The first of these is the amendment of the restrictive economic provisions of the constitution. The two leaders of Congress and the Senate – Speaker Belmonte and Senate President Ponce Enrile -- have cast their earnest support to remedy this problem through the present Congress.

The other area of action is the approval of the RH (reproductive health) bill. This is critical in helping us bring down our high population growth rate as a nation. It is a an effective means to the conquest of poverty.

The power of presidential support when he wants certain actions taken has been amazingly demonstrated by the quickness in which he got the numbers done to impeach the chief justice in Congress. He can tilt the difference and make this country move forward more quickly as a result.

All the budgeted expenditures that the government allots to finance the CCT (conditional cash transfer) program would become easily affordable within the budget, if the economy were to grow quickly as a result of these two reforms. But without them, we will struggle long as a country of dole-out programs for the poor that will sap our strength.

Without helping to get these two major reforms to move forward, the years of the Aquino presidency will likely turn from promising to lackluster, quite ordinary, and essentially forgettable in helping our poor.

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“On the seal of the central bank.” I thank Governor Amando M. Tetangco of the BSP for informing me that the recent issuances of Philippine pesos no longer carry the date “1993” inscribed in the seal of the BSP since June 2010. I recommended in my article on the Central Bank last week that the year “1948” be used to replace “1993” in the BSP seal. I also thank him for the attractive inaugural specimens of the new sets of Philippine currency bills. At present, only a limited set of the new designs (of 20s, 50s, 100s, 200s, 500s, and 1000s peso bills) have entered cash circulation, but they should gradually displace the old ones.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/