From BusinessWorld Philippines
27 October 2011
By Eliza J. Diaz
THE PHILIPPINES should step up public spending, especially on infrastructure, to help prod domestic economic activity in the face of a possible long-drawn impact from the debt crisis brewing in Europe, a senior economist of a global bank said at the joint meeting of two business groups on Tuesday.
Developing Asian economies can weather volatilities in the global market in the medium term, thanks to strong balance sheets and resilient domestic demand, Johanna Chua, Citigroup Inc.‘s chief economist for Asia– Pacific, said at the joint general membership meeting of the American Chamber of Commerce of the Philippines and Management Association of the Philippines.
The economist assured that most Asian economies are hardly exposed to the euro zone crisis because of remote linkages with European banks.
Furthermore, the lingering weakness of the US economy is not as serious as public opinion paints it to be, given its slow but encouraging recovery.
“There is a huge divergence in data and expectation of the US economy. People have been very negative about their outlook for the US, when in fact, it shouldn’t be a cause for concern,” Ms. Chua said.
“It won’t go through another recession because, in a way, the US never had a strong recovery from the 2009 crisis anyway. So contractions, if any, should not be as much, since there is no room to fall anymore.”
Governments and businesses, Ms. Chua explained, should worry instead about the European Union as complications of the sovereign debt crises there require a delicate balancing of various political interests.
Because of these, the bloc’s leadership has been slow to agree decisively on a solution.
EU officials meeting on Wednesday were expected to draw up a package that would involve a reduction of Greece‘s debt, recapitalization of European banks, boosting of the euro zone’s E440-billion fund to provide partial insurance for weak countries’ debt and pressuring Italy to embark on serious economic reforms.
Ms. Chua said possible outcomes can have dire consequences.
“Greece can voluntarily leave the euro zone…But if they [sic] leave, the euro zone’s credibility will crumble and this can encourage other countries to leave, leading to the collapse of the currency,” she said.
“If Greece stays but keeps violating fiscal measures required by the ECB (European Central Bank), they will pose a moral hazard to the euro zone. Ireland and Portugal can stop fiscal tightening measures, since they see Greece receiving money even if it doesn’t comply with them.”
Not that emerging economies have been completely insulated from Europe’s problems, which have started to affect global trade.
“In Asia, we’ve seen the biggest weakness posed by the electronics sector because of the fast inventory cycles of technology firms. We’ve seen that in South Korea, particularly, in the semiconductor and LCD (liquid crystal display) industries. The same is true for the Philippines, although it’s not as exposed because of the low value added of its electronics exports,” Ms. Chua said.
“The effects in Asia have been very different for each country. Hong Kong, Singapore and China in a way are the most affected right now by Europe since these are financial centers. The southeast [Asia] has little exposure from the debt.”
The government has blamed uncertainty in the United States and Europe for the nearly flat 0.9% rise in merchandise exports to $33.308 billion in the eight months to August, involving four consecutive months of annual contractions; recent annual drops in electronics exports and imports; as well as the huge rise in gross outflows of foreign portfolio investments to $1.239 billion for the month of September, causing the first annual fall in net inflows – by -69.7% to just $149.68 million that same month – in 2011, so far.
At the same time, Ms. Chua advised the government to take advantage of its improved fiscal space.
The government reported on Wednesday that it posted a budget deficit of P52.994 billion in the nine months to September that was just a bit more than a tenth of the P234.35 billion programmed for that period.
Revenues rose by more than a tenth to P104.337 billion.
But expenditures, at P1.07 trillion, were still 7.31% less than the P1.155 trillion spent in the same period in 2010 and about P200 billion short of the P1.275-billion full-year program.
“The balance sheets of the Philippines have never been better coming into the global slowdown. The Philippines has a lot of room for fiscal stimulus. The question is whether the current administration can overcome its fiscal rigidity and accelerate infrastructure projects,” Ms. Chua said.
“The problems of the Philippines are quite glaring and obvious. It has one of the lowest GDP (gross domestic product) to investment ratios in Asia and the infrastructure is atrocious. The missing link is always infrastructure, which needs public-private partnerships, but the public sector in the Philippines is known to slow down these projects,” she explained.
The government launched late last year its centerpiece public-private partnership program, designed initially to boost spending on infrastructure that would spur economic activity nationwide. That program, however, has encountered long delays, caused purportedly by government reviews to make sure projects concerned will not be questioned later on.
“Now is the time to spend on infrastructure, when the global economy is shaky, to offset the slowdown and stimulate further domestic demand,” Ms. Chua said.
“If these infrastructure projects are done properly, the Philippines can easily become one of the more competitive economies in Asia.”