PH: The economy in 2016: Transition or follow through?


By Alvin P. Ang

WITH less than 100 days before election day, Eagle Watch held its first economic briefing for 2016 on February 2 at the Ateneo Rockwell Campus. Together with Rose Fres Fausto, who gave her proposed guidelines on choosing the right candidates, we provided the economic direction for this year and the expectations after the elections. Below are the gist of our analysis.

We see the economy expanding within a range of 6.3 percent to 6.5 percent full year. This is due to our expectations that the first half of the year will be driven strongly by election spending being translated into consumer spending. This will be supported by the momentum of public and private infrastructure. Durable equipment growth and the rebound of imports in the second half of 2015 are expected to go online to help boost manufacturing and exports this year. This is despite the consensus view that agriculture will be a drag to overall growth because of the worst El Niño. The extended dry season will be an opportunity for construction and infrastructure to be sustained, thereby extending the highest level of infrastructure in the last five years. The second half, meanwhile, is seen slowing down as the new administration faces adjustment. However, we also see that the effects of the El Niño will start to taper off, allowing agriculture to positively contribute to the adjustment slack.

Consumption, comprising about 70 percent of expenditure contribution to GDP, will remain as the key driver of growth.  For the full year, we expect that consumption growth will not fall below 6 percent. Our forecast of weakening of remittance growth to 2.75 percent does not mean slowing consumption. Remittance per capita is set to slow down because of the changes in the structure of overseas Filipino workers (OFWs). More lower-skilled with lower pay now dominate the OFWs. However, in terms of actual number, there are now more lower-income families receiving remittances. Thus, we foresee this as also contributing to consumption growth.  Furthermore, we are looking at the compensatory effect the sustained increase in business-process outsourcing (BPO) can contribute. The BPO sector is still likely to increase revenues by at least 10 percent this year. It could match the value of remittances in the next three to five years. It could be made faster if the share of higher value components, such as animation and the creative industries increase, as well. On the income side, increased, consumption will support growth in wholesale and retail trade, finance and real estate.

On the external side, global challenges caused by the weakness of the Chinese economy has led to an overall weakness in emerging-market economies, including the Philippines.  This is being reflected in the weak export performance in 2015, as the country is connected with the global supply chain, especially in electronics.  On the financial side, the weakness of China has been reflected in the downturn of the  local stock market.  From highs of close to 8,000, the market has now retreated to about 6,200. As it is dominated by foreign trades, the weakness of the market has also translated to the weakening of the peso. With the decline of the market of about 4.2 percent from 2015, the peso also reflected a decline of 5 percent.  Nonetheless, we see the fundamental value of the peso to adjust to an average of about 48.50 to the dollar for the year. This is taking the view that the strong US dollar will continue to contribute to the peso’s general weakening.  Meanwhile, an approach in volatile markets is to look at the listed firms’ net-income growth and GDP growth. Our investigation reveal that the average net-income growth of listed firms hem closely to the average GDP growth of about 6.2 percent. It suggests that current fundamental valuations are consistent with GDP growth. Hence, since we are expecting a higher GDP growth, part of it should be contributed by the listed firms.

Under these conditions, the mid-year turnover of the government will need to have serious thoughts on how to safeguard economic gains of the Aquino administration. The forecasted numbers assume that the new government will take a follow through stand. This is likely because we see the achievement of the investment grade status and the stable outlook the country has received under this administration are pressures for the coming government to ensure the parameters that have led to these are maintained or made better.  To do this, all the candidates must lay down clearly a short-term and a medium-term priority list of economic policies. For the short term or within the first year of administration, candidates must spell out clearly their policies and programs to manage and respond to the international financial markets, the effects of El Niño and a management plan to solve Metro Manila traffic decisively.  In the medium term, clear actions are needed on how to increase local manufacturing and agricultural links to the global supply chain; making growth connect with the poor through significant improvements in agricultural productivity; and continued investments in social protection to further improve health and education.  The economic issues in this election must go beyond the usual inclusivity, anticorruption and antipoverty messages to ones that look specifically on the external, environmental and governmental demands in the next 25 years.


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