...the sports car economy

PH can drive a ‘sports car’ rather than a ‘jeepney’ economy if…

By: Doris C. Dumlao
Philippine Daily Inquirer

Monday, July 16th, 2012

 

 

The Philippines can prove that it drives a “sports car” rather than a “jeepney” economy by embarking on further interest rate cuts and a more aggressive government spending given the challenging global environment, a Bank of the Philippine Islands research said.

 

 

 

A paradox of economy from traditional (jeepney) to modern (sports car) , from slow growth to fast emerging economy.

With the negative backdrop of the European debt crisis, a floundering US recovery, the slowing of China and weakness in commodity prices, the Philippines might have no choice but to grow internally through government spending on infrastructure in tandem with stronger domestic private sector investment and consumption, according to a July 12 research written by the BPI financial markets group led by economist Emilio Neri Jr.

“The national government must ramp up efforts to spend on infrastructure to address backlogs in traditional growth drivers. At the same time, the BSP [Bangko Sentral ng Pilipinas] may help spur the domestic economy through some form of monetary easing in the near term to give the economy an added shot in the arm,” the research said.

The BPI research favored a fresh policy interest rate cut to a new record low of 3.75 percent or lower, which was in contrast to the mainstream view that the BSP would likely keep its overnight borrowing rate steady at 4.5 percent for the rest of the year. The BSP has slashed its key rates by 50 basis points earlier this year.

“These policies combined with efforts to increase our overall competitiveness can help the Philippines finally prove to the world that it has never been a ‘jeepney economy’ all these years but may have instead been a ‘race car’ all along—except that this time—it’s not about to run out of gas,” the research said.

The research noted that the domestic economy has managed to maintain a strong external position while growing above 6 percent. It said this meant that the Philippines was not about to overheat in the same fashion that it did in the 1980s and the 1990s when the root cause of sharp economic slowdowns and contractions were widening current account deficits and balance of payments (BOP) problems.

The BPI research said these observations also seemed to suggest that faster growth might not necessarily result in “demand pull” inflation given the large surplus of the labor force, which could lead to a slower increase in Philippine wages compared to nations with tighter labor supply.

“Demand pull” inflation occurs when consumer prices rise because demand is greater than supply or more commonly described as when there is “too much money chasing too few goods.”

The research noted that the Philippines was previously given the moniker “the jeepney economy,” in reference to its sub-par historical growth performance and extreme susceptibility to “overheating” or building inflationary pressures even at the slightest acceleration in gross domestic product (GDP).

When the 6.4-percent Philippine GDP growth rate for the first quarter was announced last May, it noted that the majority of conventional theorists concluded that the Philippines need not cut interest rates further despite headline inflation persistently ranging below the BSP’s 3-5 percent inflation target.

But aside from avoiding the usual contractions that historically followed six straight years of growth, the Philippines has broken the trend and managed to actually grow for 13 straight years since 1999.

On the other hand, it noted that Philippine economic growth prior to four contraction episodes in the past was always funded through leverage, which ultimately led to a sizeable build-up in external liabilities and the economy’s susceptibility to sudden stops in foreign capital flows.