PH needs reforms to sustain growth

The Philippines has gradually broken away from its tumultuous past to become “one of the greatest comeback stories,” but more reforms were needed to sustain progress, according to British banking giant HSBC.

In a macroeconomic commentary titled “In a Sweet Spot: But is the Love for the Philippines Justified?” HSBC economist Trinh Nguyen upgraded the domestic economic growth forecast for the Philippines this year to 5.9 percent from 4.9 percent following the better-than-expected performance last year.

The HSBC economist also predicted in the Feb. 22 research that a sovereign investment-grade rating would likely happen by the second half of this year. But she noted that reforms to address long-standing challenges were still required to reverse the underperformance of foreign direct investments (FDIs) or long-term funds used to build or expand factories and other job-generating enterprises.

“While attaining an investment rating upgrade will likely have a positive effect on FDI inflows as funding becomes cheaper for corporations, foreign investors will be watchful of reform momentum such as improving electricity production, transportation and, most importantly, easing restrictions on foreign ownership,” Nguyen said.

On the whole, Nguyen said the Philippines looked on its way up with plenty of opportunities to look forward to. She noted that the midterm elections this May would most likely affirm President Aquino’s political clout through the ruling Liberal Party. “What’s more noteworthy to watch is the replacement of President Aquino in 2016, which would signal whether the reform momentum in the Philippines will be sustained,” she said.

The research said the 6.6-percent gross domestic product (GDP) growth posted by the Philippines last year was a “remarkable feat, especially given the backdrop of the global slump in 2012.” It noted that remittances had shielded the Philippines from sluggish external demand while timely fiscal and monetary policy also bolstered government and private consumption.

For this year, HSBC’s upward revision of its GDP forecast by one percentage point was to reflect a stronger growth in Japan, improved economic indicators from the United States as well as unusually accommodative monetary policy both abroad and at home.

“Acquiring cheaper and more stable sources of funding will lay a foundation for the government to focus on broader reform agendas. And a lot of work is still required,” Nguyen said. “While the country is endowed with natural resources, a skilled labor force, favorable demographics and a dynamic domestic market to counter the global slump, a still lackluster infrastructure and business environment hinder investment and productivity.”

Stagnant FDI inflows reflected challenges such as high costs of electricity, poor infrastructure, and restrictive ownership laws, she pointed out. “As such, we remain watchful of further reforms to transform the economy.”

Portfolio inflows have been strong, reflecting the bullish short-term economic outlook, but Nguyen said FDI inflows were more indicative of investors’ perceptions of the government’s progress in resolving long-standing challenges.

In this regard, the research said there were signs of progress, with the government stating it would consider revising the foreign ownership law. However, the HSBC economist said she believed it would take time before these reforms could be implemented and the earliest this could take place would be 2016, when President Aquino could afford to use his political capital to change the Constitution.