By Andrew James Masigan
While much has been said about the Philippine’s rise to become Asia’s fastest growing economy, the story beneath the numbers is far more compelling. The economy if fundamentally stronger today than it was in the last 60 years.
The Philippine economy expanded by 6.8 last year besting China’s 6.7% and Vietnam’s 6.2%. Our growth should have topped 7% if not for the 1.1% contraction in agriculture in the fourth quarter.
The real good news is that is the industrial sector’s growth of 8% outpaced that of the service sector at 7.5%. This is significant because it shows that government’s Manufacturing Resurgence Program (MRP) is beginning to gain traction and that our industrial base is now widening after decades of contraction. Industry generates more high-quality jobs than the service sector.
Statistics further indicate that we are becoming less of a consumer driven economy and more an investment lead one. Household and government consumption grew by just 6.9% and 8.3%, respectively, while Fixed Capital Formation (FCF) blazed forward at 20.8%. For those unaware, FCF refers to the inputs that contribute towards making an economy more productive. This includes investments in factories, machineries, roads, ports, and the like.
Private investments have increased. This was complemented by the Duterte administration’s intentional spending spree on public works. Interestingly, not even the President’s radical pronouncements against western democracies doused investor confidence (expect in the 3rd quarter). This is because none of these pronouncements have become official policy.
With capital formation on the rise, the economy’s Incremental Capital Output Ratio (ICOR), which refers to the relationship of capital and productivity, has also risen. As of last year, Philippines registered an ICOR ratio that’s 3% greater than the ASEAN average. This tells us that a structural transformation is now happening within the economy. So long as trends do not change, our trek towards industrialization will continue apace.
Government’s target is to grow by 6.5%-7.5% in 2017 and forward to 7%-8% from 2018 to 2022. Most reputable economic think tanks forecast growth of 6.5%for the next six years. At this pace, enough wealth will be generated to slash poverty rates from 22% today to 14% in 2022. However, it comes with the caveat that wealth be distributed equitably. This, unfortunately, is our Achilles heel.
See, two-thirds of economic activity is concentrated in three regions alone. NCR accounts for the lion’s share of 36% of GDP, Calabarzon 17% and Central Luzon 9%. The rest of our fourteen regions split the remaining 38%. Unless economic activity is diffused to the countryside, economic inequality will persist. Hence, regional development is the new battle cry of government.
While the general prognosis of the economy is favorable, it does not come without risks. The slowdown of China and the EU will continue to adversely affect our exports. Fortunately, OFW remittances and the new wave of remittances from Philippine multinational abroad have cushioned its effect on our current account.
Other risks include potential protectionist foreign policies by the US and geo-political risks borne out of China’s creeping invasion. On the domestic front, logistics bottlenecks due to the infrastructure gap, the vacuum left by the sweeping closure of mines and weather disturbances affecting agriculture could drag growth.
Achieving economic growth of 7% until 2022 is only the first segment of our 25 year development plan. There are two more trenches until the year 2040. By then, we must have realized the national vision of being, and I quote, “a prosperous, predominantly middle-class society, where no one is poor. Filipinos will enjoy long and healthy lives, are smart and innovative, and will live in a high-trust society.
2016 was one step forward towards the realization of the national vision. It sets the stage well.
Andrew is an economist, political analyst, and businessman. He is a 20-year veteran in the hospitality and tourism industry. For comments and reactions, e-mail email@example.com. More of his business updates are available via his Facebook page (Andrew J. Masigan). Follow Andrew on Twitter @aj_masigan.