Bump in the Road
The country received some sobering economic news last week. During the first quarter of the current year, the Philippines was able to sustain its economic recovery and expansion with a GDP growth of 6.4 percent, a growth rate that actually exceeded forecasts. But the second quarter data took the wind out of that recovery trajectory when the economy grew by 4.3 percent, the slowest since the first quarter of 2021 when the economy contracted 3.8 percent.
According to the National Economic and Development Authority (NEDA), part of the reason for the surprisingly lackluster economic performance was public underspending. Government spending during the second quarter decreased by 7.1 percent, the lowest since the first quarter of 2011 when it contracted 15 percent. NEDA in fact noted that “if only the spending targets of the government were met, GDP in the second quarter could have reached 5.6 percent.” This is probably because government has reined in spending in order to improve the fiscal balance specifically by setting a budget deficit ceiling of ₱1.499 trillion, which is equivalent to 6.1 percent GDP.
I think this is a consequence of government’s efforts at fiscal consolidation addressing the issues of the deficit and debts. In other words, government is not spending that much in order to rein in the deficit and manage our debts which contributed to slower economic activities.
Another factor, I think, is the high interest rates. The Bangko Sentral ng Pilipinas (BSP) increased borrowing rates by a cumulative 425 basis points since May last year. I understand why this was necessary. I certainly see the concern of economic managers with regard to inflation and the weakening of our currency. But I can tell you that this has in effect depressed capital formation. Many businesses have been negatively impacted by this policy decision, justified as it may seem.
So, where are we now? Is this a slippery slope and are we headed to an economic slowdown? I do not think so. The important thing to do is for economic managers to make sure that this lackluster performance is merely a bump in the road to recovery. A blip in our impressive post-pandemic economic growth. And I have full confidence in President Ferdinand Marcos, Jr. and his economic team’s ability to regroup and redirect the economy to its upward trajectory.
Finance Secretary Benjamin Diokno has stated that we need to achieve “growth of 6.6 percent in order to regain our momentum and achieve the target rate of six to seven percent for the year.” I have confidence in Secretary Diokno’s ability to turn things around. He is a seasoned economist who has experienced many difficult situations in the past.
I was able to see him in action when he was Budget Secretary of the Estrada administration. I was Speaker of the House then so I had a front row seat to his patriotism, intelligence and ability to navigate even the most difficult economic challenges.
So when Secretary Diokno stated with confidence, that “this year's economic growth target is within reach, I believe him. I also think this is achievable. Difficult but possible. The finance secretary cited government’s “aggressive catch-up plan” for “infrastructure projects, quicker response by GOCCs (government-owned and controlled corporations), and strong and deliberate spending by resource-surplus local governments”
NEDA Secretary Arsenio Balisacan added that government is already looking for ways to accelerate the “execution of government programs and projects, including the delivery of public services, under the 2023 national budget.”
Specifically, government needs to address the chronically weak absorptive capacity of implementing agencies. Absorptive capacity is a term used to refer to the ability of organizations to implement projects and investments so that they achieve their intended objectives.
According to the Budget department, government agencies’ budget utilization rate was at 91 percent in May, slower than the 93 percent rate last year. This has always been a concern. Even when money had already been released, some agencies have been slow to spend. In other words, money is not an issue. What is an issue is the capacity of agencies to efficiently spend money in order to provide services to our people and in effect pump-prime the economy.
The good news is that our economic managers know the problems and have a very good understanding of how we can deal with it. Let us hope that the last two quarters of the year bring us better news.