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Philippines needs to outperform itself in 2014, not just its neighbors – because it can


This was the clear message from Mr. Ronilo Balbieran’s briefing on the Philippine economy presented to the people of KSearch Asia Consulting, Inc. last Wednesday, February 5.  Mr. Balbieran, formerly a member of the Economics faculty of the University of Asia and the Pacific, is now an Infrastructure Development Consultant from the Research, Education and Institutional Development (REID) Foundation, Inc.  Among REID’s ongoing principal clients  are the Department  of Tourism and the Department of Public Works.

 

For the sixth consecutive time, Mr. Balbieran has provided updates to the Ksearch employees on the state of the Philippine economy, as well as its future trends.  This time he cited the good and bad turns of events that dominated the news last year where he tried to make sense of the seeming paradox of an actual economic growth accompanied with higher unemployment and hunger rates. To make better sense of all that have transpired from an economic perspective, he revisited the three approaches to understanding the Philippine Economy: The One-Man Model; The Household Model and the Bathtub Model.

 

The One-Man Economy framework assumes a range of economic activities revolving around one person.   This meant that this one person initiates the economic activity such as producing one useful item, selling that item, deriving the benefits or proceeds, than continue or expand the cycle.  In effect, it is his personal “GDP” and serves as a microcosm of a bigger economy when multiplied many times over.  GDP is total value of all the economic activities within the country while the GNP (GNI), Mr. Balbieran pointed out, includes the total value of the activities generated by Filipino citizens outside.

 

Mr. Balbieran then discussed the expenditure and the production approaches to interpreting the GDP. Through both approaches, we learned that the Philippine economy's total domestic activities (GDP) for 2013 are valued at P11.5 Trillion, while OFW remittances (Net Factor Income from Abroad) contributed some P2.2 Trillion. Thus the Philippines' GNI for 2013 is P13.7 Trillion.  He also pointed out , not without  some hint of dismay, that for now the economy is driven by Private Consumption (mostly consisting of  imported goods), roughly representing as much as 70% of the domestic activities and that this phenomenon is obviously backed by the remittances of the OFWs.  He didn’t want us to overlook the fact that , for a developing country like the Philippines, the services sector represents 57% of the GDP, a trait usually associated with the more developed countries.

 

The other analysis of the economy is akin to that of a household. The Economy as a Household framework looks at one's income that is consumed by spending, resulting to either a current surplus or a deficit. The surplus or deficit would then dictate whether one's savings increases or decreases. In case of a total lack of savings, one must have access to other people's money. The analysis emphasizes the importance of a good amount of savings as it allows for a healthy financial position and a relatively predictable price environment.

Mr. Balbieran noted that thanks to the continued surge in OFW's remittances, the Philippines has slowly built up a very good financial position.  The country is virtually awash with much money. The BSP or Central Bank has feared that allowing so much money in the economy would cause inflation;  hence, they established at one time the Special Deposit Account (allowing as much as 4.5% interest rate) where the private banks stored OFW's money (some P2 Trillion) -- a move which received so much criticism as the central bank lost vast amounts of money  in the process just to prevent the money flooding the in the economy.  This artificial good times for the commercial banks is now a thing of the past.  Interest rate from the BSP for the SDA’s have now been reduced to around 2%, thus forcing the banks to withdraw these idle funds and in turn use them to finance projects, especially the small and medium enterprises. Overall, he estimated for the Philippines to have about US$83 billions of dollar reserves.   

 

Mr. Balbieran said that the household analysis would show that there is a lack of trickledown effect, attributing this to inadequate economic use of the continuously rising OFW’s remittances which otherwise are harnessed by the BSP into the Special Deposit Account.

 

The Economy as a Bathtub model depicts the third method of analysis, showing graphically the major economic activities of Production, Spending, Employment and Income occurring within the bathtub. The bathtub showed inlets consisting of Investments, Exports and Government Spending flowing back into  the tub while it showed outlets for factor of Savings, Imports and Taxes, flowing out of the tub. In this analysis, we discerned that Investments are always the best form of economic activity as it is injected into the economy and does not have any direct outlet. We also learned that too much savings, imports and corruption (taxes) bleed an economy dry. Too much money in circulation (water in the bath tub), however, risks inflating the economy to unsustainable levels. The ideal situation is when the water is just about right to fill the bathtub as it brings about the “Animal Spirit” in the people. The Animal Spirit is described as the spirit of confidence in the consumers and with which the producers can go about their normal business activities.

 

Mr. Balbieran feels that the Philippines has, in fact, a very good problem, i.e., that the country has a ample under-utilized resources and reserves in its hands (those coming from OFW remittances).  It’s a kind of problem that provokes not merely growing for the sake of growth but growing at a formidable rate not yet seen ever before.  He argues that current GDP/GNI growth rate could have gone faster had the Public Private Partnership projects been approved earlier.  In this connection, he shared with us  status of certain infrastructure projects that, if pursued vigorously by the government this year, can make 2014 a truly formidable growth year – barring any major calamity the proportion of the Yolanda typhoon the country experienced in November last year.  On this note, he predicts 2014 as a Year of Big Hopes, some of which are quite easily achievable.         

 

Reported by:

David Bien Paje, Research Associate

BPO, Finance and Accounting Practice Area        

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