Fiscal pump priming seen necessary to boost growth

The Philippines is seen in dire need of immediate fiscal, rather than monetary, pump priming to help boost economic growth.

Even as economists fret over prospects for the domestic economy this year through 2012 following the disappointing third-quarter economic report, the Bangko Sentral ng Pilipinas is expected to keep its interest rates steady in its meeting Thursday, the last rate-setting meeting for this year.

“Overall, we believe the odds are in favor of continued lethargy going forward,” said New York-based think tank Global Source, which predicted that the country’s fourth-quarter performance would likely be no better than the disappointing 3.2 percent growth in the third quarter.

Citing the gloomy global outlook and weak local drivers, Global Source trimmed its gross domestic product forecast for the Philippines this year and next year to 3.5 percent and 4.5 percent, respectively, from 4.3 percent and 4.8 percent.

The Global Source report titled “Stuck in Low Gear,” written by economists Romeo Bernardo and Margarita Gonzales, said surprises could be on the upside if private demand remained strong and if economic managers would make good on their promise to accelerate spending.

“While monetary authorities may still postpone rate cuts until the end of the year, we believe they would be increasingly motivated to act if sluggishness in the economy persists,” Global Source said.

British banking giant HSBC said monetary officials would find difficulties in deciding on what to do with the key policy rates when they meet on December 1, given that the growth outlook and inflation pressures were equally challenging.

HSBC economist Trinh Nguyen said the latest economic data lent little support for the view that interest rate cuts would do much to boost growth. “Local consumption is already growing nicely and net exports would hardly benefit. But there is a second argument why the BSP may wish to hold its fire for now: high inflationary pressures and excess liquidity,” she said.

Given elevated price levels, Nguyen said an interest rate cut would further escalate inflationary pressures without significantly boosting growth.

“Additionally, given that fiscal expenditure has been slower than usual thus far this year, there is space from the fiscal front to boost demand, which is considered a preferential and effective way to boost demand as it immediately affects growth. As such, we believe the BSP will hold rates steady and allow fiscal policy to do the difficult job of offsetting global weakness by supporting domestic demand,” she said.

Investment bank Credit Agricole CIB shared a similar view. “Although we expect the BSP to keep its key rates on hold on Thursday, the GDP outcome adds to the case for some form of easing/stimulus. Indeed, government officials said, following the GDP releases, that the Philippines has fiscal ability to stimulate the economy.”

“What is clear is that the stronger peso-dollar rate has taken its toll on the economy. Exports fell 13.1 percent while net primary income declined 3.4 percent in third quarter of 2011. So despite better personal consumption and government spending, the overall impact has been—not much,” said Jose Mari Lacson, head of research at stock brokerage Campos Lanuza & Co.

The contradicting data in GDP makes it difficult to make an actionable conclusion, Lacson said. “The economy is definitely slowing down even after we net out the effect of the May 2010 election. We know which sectors are affected but we don’t know why these sectors are slowing down,” he said.

Instead of just accelerating spending, Lacson said the government might want to take a look at how to minimize the impact of a strong peso to the domestic economy.

“Maybe instead of focusing on political objectives, the Aquino economic team should try to understand why the economy isn’t growing and why their economic policies are failing to solve the problem,” he said.