Briefing a group of businessmen at the World Economic Forum in Davos, Finance Secretary Ben Diokno forecast Philippine growth this year at 7 percent. That has to be a fighting target.
By contrast, the most optimistic independent analysts downgraded our growth forecast from 6.3 to 6.2 percent. Most estimate our growth to be in the range of 5 percent.
It is most important to point out that no one, under any scenario, is forecasting our economy to slide into recession. Some of the major economies are seen to slide into recession, which is technically two consecutive quarters of negative growth.
Since we are not a primarily trading economy, we will be relatively insulated from the trend towards recession in some major economies. We are not, however, insulated from the main factors stalling the economy: mainly energy costs.
Our growth prospects will definitely be better if we are able to contain inflation. Our economy is estimated to have grown by 7 percent in 2022 despite an elevated inflation regime. The prevailing inflation rate is discounted against nominal growth performance.
The robust growth number Diokno forecasts must have worked on the assumption of a dramatically lower inflation rate. Only such an assumption makes his bold estimate feasible.
The strong 2022 performance has been due largely to the release of pent-up demand during the two years of mobility restrictions. We see this phenomenon in most other economies. It is sometimes described as “revenge spending.” This is not, however, an inexhaustible force that will drive economic growth into the future.
In 2023, however, we must transition beyond pent-up demand. We need to attract new business activity and more investments.
Investors do not come to town with bags of cash to set up businesses from scratch. Most usually, they form joint ventures with local businesses or take advantage of privatization deals. Much of the money that powers business in our markets are invested in equities. Such investments are called “hot money” because they can quickly sell down and run away at the first sign of a downturn.
We have clear disadvantages when it comes to attracting investments – or even keeping Filipino capital to stay home.
We do not have a large corporate sector like Thailand. Nor do we have large state-owned enterprises such as Vietnam. Large corporate entities are efficient at forging joint ventures and inviting partnerships. In addition, we have a Constitution that keeps alive old economic orthodoxies inherited from the 19th century. We saw the effects of our anti-business Constitution in the most recent Supreme Court ruling on joint mineral exploration in the South China Sea.
President Marcos is usually accompanied on his foreign trips by a business delegation composed of our most important tycoons. This is because they are the ones most capable of forging partnerships with international investors. There is no sense in bringing along a delegation composed of small businessmen and NGO types. They attract no investments.
Over the longer term, our development policy should focus on rapidly enlarging our corporate sector and building agro-industry. This is the only way we can tap into the channels of direct investments. To achieve this, our government must be stubbornly pro-business. Enough of the old economic nationalism that dragged us down to the bottom the past few decades.
The widely anticipated recession in the major economies this year may be overstated. China, to be sure, will grow by about 3 percent. This is its slowest pace of growth in two generations and may produce a lot of social stresses, particularly in the form of disillusionment among young workers. But it will still be growing.
The US is working very hard to avoid sliding into recession. However, the US is quickly running short of workers even as it tries to revive its manufacturing base. The low unemployment numbers seen in the US economy is only one side of the coin. The other side is demographic inability to provide enough workers to sustain growth.
Some analysts are saying that, because of security concerns, the world will veer sharply from globalization and head towards localization. For example, the US is now encouraging local production of computer chips even if what they produce will likely be more expensive (although not necessarily inferior) to those produced by Taiwan. Nevertheless, the experience with the pandemic and the war in Ukraine encourages firms to shorten their supply chains or risk getting stranded.
In our neighborhood, rising tensions at the Taiwan Strait encourage high tech industries in both China and Taiwan to relocate some of their production. We have little chance to compete for these investments because of our poor infra, expensive power and inferior human capital. The only site we have to offer is the industrial zone beside the new airport San Miguel is building in Bulacan (with very little government encouragement). This new industrial site is expected to host about $200 billion in investment – a boon government did not even plan for.
As has been the case for decades now, remittance inflows from our foreign-based workers fuel our consumption-led growth. Remittances is not an inexhaustible boon, however. While aggregate annual remittances is still growing, our November numbers show an unusual decline in remittance flow.
Ben Diokno’s 7 percent growth number is encouraging. But so much has to be done at home to keep our economic expansion sustainable.
We can begin by correcting whatever it is that made onions in our market the most expensive in the world.