Business groups welcome unexpected results

MANILA, Philippines–Business groups on Thursday welcomed the faster-than-expected economic growth in the second quarter amid the truck ban and port congestion in Manila, and other issues like questions about the stability of power supply and prices.

The business community said that had these issues been addressed more effectively, the economy would have posted a higher growth rate.

Alfred M. Yao, president of the Philippine Chamber of Commerce and Industry, said the gross domestic product (GDP) growth could have been higher if not for the port problems, which started to hit the economy hardest in June.

“Despite the problems, we hit 6.4 percent. But hopefully by September we can recover all the losses (incurred from the port congestion problems) so that we can end the year with a GDP growth of 7 percent,” Yao said.

Peter V. Perfecto, executive director of the Makati Business Club, said the growth showed that the local “economy appears to be on the steady upswing going into the second half of the year.”

DAP, port congestion

“However, we also maintain that there remains space for improvement. Agriculture has expanded, but total contribution to the GDP remains low. Manufacturing has done well; however, there are still concerns on port congestion, energy supply and the Manila truck ban. Public construction has slowed down and we believe this is among the effects of the Supreme Court decision on the DAP (Disbursement Acceleration Program),” Perfecto said.

The Supreme Court declared last month that the DAP, an economic stimulus program whose funds were derived from savings of government agencies, was unconstitutional.

Dan Lachica, head of the Semiconductor and Electronics Industries in the Philippines Inc., said the goal of 6.5-percent to 7-percent GDP growth this year was at risk if the port congestion caused by the Manila truck ban was not resolved.

For Management Association of the Philippines president Gregorio Santillan Navarro, the -uarter growth was good considering the DAP controversies and the gloomy outlook that everyone was projecting. This meant that the country has a better chance of achieving its growth target for this year, he said.

Benjamin Diokno, economics professor at the University of the Philippines, said a realistic growth rate for the Philippines in 2014 was around 5.9 percent.

He doubted whether growth in agriculture could be sustained due to the coming El Niño. He was similarly pessimistic about the manufacturing industry due to the country’s power situation.

Unemployment, poverty

“If we have these growth rates, the effect on unemployment and poverty still won’t be significant,” Diokno said.

He said that as the government tried to hike spending in the coming months, policymakers should focus on the agriculture sector, where bulk of the country’s workforce is employed. “Those jobs are where the jobs are and those jobs are cheap to make,” he said.

“We have the highest unemployment in this part of the world. And that’s not even counting the 10 million Filipinos working abroad,” he said. “We have to solve that.”

Not so rosy

HSBC economist Trinh Nguyen said that while there was a higher-than-expected net export growth, “the picture was not as rosy as it appears given slowing domestic demand.”

She noted that the pickup in net exports was primarily driven by a sharp slowdown of imports, caused partly by port congestion in second quarter 2014 and a favorable base effect for exports. “With these factors abating in second half, net export growth will be reduced,” she said.

She said the expenditure breakdown of the GDP showed a broad-based slowdown in private consumption, government spending, investment and inventories.

“The sharp slowdown of imports, which reflects both Manila port congestion and slowing domestic demand, generated good news in second quarter but will negatively impact growth results in second half 2014,” she said.

Nguyen said import growth would normalize in the second half once port congestion issues were resolved while exports would likely stall as the favorable base effects fade.

HSBC believed that GDP growth would slow down to 5.9 percent this year from 7.2 percent in 2013. “While fiscal spending will pick up in second half 2014, its scope for growth will be limited due to the ongoing controversy over the DAP, which is seen leading to more conservative spending patterns,” it said.

Electricity sector

Nguyen said that while manufacturing was making a comeback, providing an important boost to the service-dependent economy, manufacturing expansion would likely be limited by sluggish pace of electricity sector growth.

“We believe that without broad-based sectoral growth, especially in infrastructure investment, the economy will continue to show signs of overheating,” she said.

Structural shift

Jose Mari Lacson, head of research at Campos Lanuza & Co., said the growth in the second quarter “is the start of a structural shift in the Philippine economy toward a more export-based platform on the back of strong domestic demand.”

While consumer demand growth remained strong, Lacson said it was exports growth of 10.1 percent that was a “revelation.”

“If we view that in combination with the double-digit expansion in manufacturing output, that would suggest that Philippine industries and food manufacturing in particular are no longer just service domestic-consumer demand but have started to serve the rest of the world market as evidenced by exports.

“The base is still small of course, but the point is, on a net output basis, we now have the ability to produce for other economies, something that we lost in the 1980s when we shifted from copra production to semi-conductors,” he said.

Construction takes backseat

Emilio Neri Jr., economist at Bank of the Philippine Islands (BPI), said the faster-than-expected growth would help reduce uncertainty about the sustainability of the surprisingly strong performance of the domestic economy in the last few years.

“It was a relief to see that growth is finally being led by agriculture, manufacturing as well as exports while construction and retail trade take the backseat. We will not be surprised if this will actually lead to an improvement in employment and poverty statistics this year versus 2013,” Neri said.

The GDP report, Neri said, gave his team at BPI the confidence to retain the full-year growth of 6.2 percent, much faster than most Asian emerging market peers.

“We expect GDP prints of 6 percent or higher to be sustained in second half 2014 as favorable domestic financial conditions continue to foster strong household consumption activity, which provided a boost to the overall nominal output,” Neri said.

In a separate research, Metrobank said weak government and investment spending dampened what could have been a much higher second-quarter GDP growth.

Metrobank still expects full-year average GDP growth to hit at least 6 percent, with a very strong upside bias amid expectations that construction will post faster growth in the second half of the year as infrastructure spending picks up.

Furthermore, the sustained double-digit growth in the manufacturing sub-sector is expected amid the strong domestic and external demand while base effects are also seen to kick in given the slower growth in the second half, Metrobank said.

Risks

“Risks to the domestic economy, nonetheless, remain amid the still unresolved port congestion, issues on the government’s Disbursement Acceleration Program, and impact of financial market volatilities,” it said.

John D. Forbes, senior adviser at the American Chamber of Commerce of the Philippines (Amcham), noted the level of GDP growth in the second quarter could be sustained given the current administration’s good governance and political will to reform.

“Above 6 percent is better than most Asean economies but should be raised to higher levels because this will reduce poverty faster. The long cycle of constant high levels of poverty in the Philippines has been broken by the high growth above 7 percent last year. Nothing could be more important to the nation than inclusive growth,” Forbes said.

Henry J. Schumacher, vice president for external affairs at the European Chamber of Commerce of the Philippines, said the growth was still good and reflected the consumption-based expansion of the economy. “It is sustainable at this level but does not lead to inclusive growth. For that to happen, more productive growth through direct foreign investment needs to be added,” he said.

Roberto F. Batungbacal, chair of the manufacturing committee at Amcham, said the performance of the manufacturing sector was a recovery from the first-quarter figures and a continuation of the robust growth in 2013.–With a report from Paolo Montecillo