On Aug. 10, the House of Representatives at the Batasan initiated the hearings on the macroeconomic assumptions behind the proposed P5.768-trillion Philippine national budget. As members of the Development Budget Coordination Committee (DBCC), our economic managers took turns briefing the members of the Lower House on how the economy performed in the previous year through the latest period in 2023 against the backdrop of persistent challenges in the global economy. For budget purposes, the DBCC members and staff gave a heads-up on what the Filipino people could expect in terms of economic growth, inflation, the peso, external payments position, and the banking system. Both the budget and finance departments presented before the Lower House how the government intends to hit its macroeconomic targets in terms of spending on projects and programs, revenue support, and planned borrowing.
The Senate started its own budget process last Tuesday, Aug. 15.
As in past budget hearings, excessive optimism could be infectious. For instance, the chief economic manager who is the finance secretary announced his happiness that the Philippines was on track to meet the Medium-Term Fiscal Plan (MTFP) targets. He assured the Lower House that “the Department of Finance and the economic team are working hard in support of the President’s agenda of attaining a future-proof and sustainable economy through the 2024 proposed budget.”
But on the same day, the Philippine Statistics Authority announced that the Philippine economy slowed down to 4.3% in the 2nd quarter, in sharp contrast to the 1st quarter’s 6.4% and the year-ago quarter’s 7.5%.
Public spending was rather weak so that instead of advancing growth, it actually pulled it down. Yes, some P4.89 trillion or 93% of the 2023 P5.268-trillion budget has been released, yet government failed to spend as programmed. It even declined by 7.1% from the 1st quarter 2022 expansion of 10.9%. Despite the budget department’s constant reminder for various government agencies to ramp up their expenditure, weak public spending turned out to be a strong argument against the higher budget proposal for 2024.
It would boost the credibility of our macroeconomic targets if we stick to science, and acknowledge the emerging risks to both growth and inflation. Perhaps we need to avoid blaming the lack of election-related spending in 2023 and temper our propensity to describe everything adverse as temporary. Blaming the tight monetary policy of the Bangko Sentral ng Pilipinas (BSP) seems improper because without managing domestic demand, domestic inflation should still be raging, restraining consumption and reining in investment. Blame inflation, rather than the tool being used to keep it under control. What happened to the non-monetary measures that should be the more appropriate instrument in addressing the supply pressures? As the BSP clarified during the other day’s Senate hearing, for each basis point increase of the policy rate, the impact on growth remains manageable.
It was the House minority leader who asked the questions more fitting to the initial budget session. He queried the economic managers on the fund sourcing of the Maharlika Investment Fund. Based on his line of questioning, the answers from his counterparts in the executive reflected the priorities of government. At a time that we need to address such basic issues as providing social and economic services in health and education, strengthening our infrastructure to keep our growth resilient and more inclusive, we would rather consolidate public funds and invest in an uncertain global market.
Given this, more and higher taxes or heavier borrowings become unavoidable. If improperly deployed, they are anti-growth.
We need to inspire our people that we are on top of the hard rock by going beyond requiring various public agencies “to develop delivery and execution strategies.” It would have been more useful if this fundamental management tool was determined and deployed yesterday rather than tomorrow.
While the budget hearings are in progress, this broadsheet reported that “more research firms cut Philippine growth estimates after disappointing 2nd quarter print.”
HSBC Global Research, for instance, slashed the country’s growth projection for 2023 from 5.3% to 4.8% against the official target of 6%-7%. Next year’s forecast was also downgraded from 5.6% to 5.2%. For HSBC, the 2nd quarter performance was a “significant downside surprise.”
Nomura Global Markets Research was in the same order of adjustment, reducing its expectation from 5.5% to 5.2% for this year. Euben Paracuelles and Charnon Boonuch noted that the Philippines has been “losing momentum in the last few quarters.”
Another broadsheet reported that Oxford Economics was more pessimistic by cutting its growth forecasts from 5.4% to only 4.5% due to what it called “lagged impact of monetary tightening on domestic demand.” This outfit expects this to continue in the coming quarters.
What we have to achieve in the second half of 2023 to hit the official target is difficult. The global and domestic risks are increasing, especially the slowdown of the global economy this year and the impending petroleum price increases in the second half. Yet, we need to grow by at least 6.6% which to NEDA “is still attainable.”
But some red flags remain up.
We had an underperforming economy due to weaker gross domestic capital formation, or investment in general. The balance of payments and the national income accounts may tell us the actual flows of investments, but it takes time to determine their composition. The BSP has just reported on it for only the first five months of the year.
Net inflows in foreign direct investment (FDI) dropped successively for three months up to May. During the month, FDI retreated by 34% from a year-ago’s $739 million to only $488 million. The BSP attributed this to “the effects of relatively higher price and interest rate levels globally.” Despite the equity FDIs from Germany, Japan, and the US, January-May net FDIs aggregated $3.4 billion, down from last year’s $4.3 billion.
FDI pledges approved by investment promotion agencies including the Board of Investments, the Clark Development Corp., the Philippine Economic Zone Authority, and the Subic Bay Metropolitan Authority reached P59.1 billion, up from P46.3 billion a year ago, but the lowest since the 3rd quarter contraction in 2022. Quarter on quarter, this level was seven times lower than the 1st quarter approved FDIs of P408.2 billion.
If the government is underspending and private investment is underflowing, from where then do we draw growth? If high commodity prices are bound to gain momentum in the next few months due to higher petroleum prices and wages, as well as the impact of the rice export ban by our neighbors, what would happen to private consumption? If the national budget is cast in stone, where do we get the money to fund a large part of it?
When we used to attend the annual budget process, it was always Senator Ping Lacson who would argue that keeping the national budget fat-free be the focus of the whole exercise. Even during the discussion of the macroeconomic assumptions, he would always succeed in flushing out some fat from the national expenditure program, even quoting the cost of corruption estimated by then Deputy Ombudsman Cyril Ramos at P700 billion a year. If this is allowed to persist, it would be difficult to reach the “overarching goal to attain upper-middle-income status while bringing down the deficit to 3% and reducing the poverty rate to 9% or single digit by 2028.”
It would be most interesting to watch the time of reckoning during the budget process for 2028, and its sequel.
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.
