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Weak peso, low FDIs, skills mismatch and lack of jobs

/ 05:00 AM August 19, 2018

The International Monetary Fund (IMF) expects the Philippines’ “current account deficit to hit 1.5 percent of gross domestic product (GDP), or five times wider than the previous projection of 0.3 percent of GDP”, says one broadsheet last July 30, 2018.

This means that there are more foreign exchange (dollar) flows out of the Philippines to pay for the importation of goods, services and capital than what flows in from exports of products made in the Philippines.

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Weak peso

The need for more dollars to pay for imports tends to increase the rate at which we exchange our pesos for dollars. The 1.5 percent deficit envisioned by IMF is more than the revised projection of the Bangko Sentral ng Pilipinas (BSP) of 0.9 percent of GDP or $3.1 billion. The same broadsheet said that last year’s current account deficit was $2.52 billion, more than the $1.2 billion recorded in 2016. The highest level of deficit was recorded in 1997 during the Asian financial crisis at $5 billion or 5.1 percent of GDP.

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Luis Breuer, IMF mission chief to the Philippines, points out why our peso is weak, “Downside risks stem mainly from rising inflation, continued rapid credit growth, higher US interest rates and US dollar, volatile capital flows and trade tensions.”

The Philippine peso has “slumped to its weakest level in 12 years.” Trading closed at P53.325 to $1 on July 27, 2018, and the peso could further weaken as the “US Federal Reserve jacked up interest rates for the second time this year, and sees two more rate hikes for the rest of the year.”

Implications

The IMF thinks that the “current account deficit is projected to remain manageable, financed largely by foreign direct investments (FDIs).” However, the BSP has lowered its expectations of FDI inflows this year “to $9.2 billion, down from last year’s FDI inflows of $10.02 billion.” Singapore and Vietnam boast of FDIs more than twice that of the Philippines’ year after year.

Lately, several foreign investors have been avoiding the Philippines as an investment destination. There are a number of reasons – high energy cost, lack of infrastructure, some anti-investor policies, TRAIN 2, etc. The several recent findings of “labor-only contracting” violations against large multinational companies have also sent shivers to these MNC’s headquarters and placed some expansion plans here on hold. Elsewhere in the ASEAN and the rest of the world, job contracting and outsourcing are the norm for doing business. In the Philippines, the Department of Labor has issued a more stringent D.O. 174, and both houses of Congress are poised to “prohibit” job contracting altogether. In the words of one Congressman, “The idea is to highly regulate job contracting until it dies a natural death.”

The labor problem

Some policy makers and legislators could be looking at the wrong problems. If they listen to my friends in organized labor, the problems that they could see are low wages and lack of regular jobs. The reality is that in the ASEAN region, the Philippines’ minimum wages are almost the highest. Temporary employment (for as long as three years) abound more in other ASEAN countries than in the Philippines. Again, our Congress is poised to legislate only two forms of employment – regular and probationary. All the flexible work arrangements available all over the world could be outlawed in the Philippines.

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The solution to perceived low wages is not to continually increase the wages. Annual wage increases are partly responsible for inflation. Only two million wage earners (who enjoy tax free privileges) are benefited with wage adjustments, while the 41 million other Filipino workers, 80 percent of whom are in the informal sector (i.e., without fixed wages and benefits), suffer the resultant inflation-induced increase in putting food on the table, transportation and other basic necessities. Other countries subsidize power and energy cost. They also focus on reducing the cost of putting food on the table. Why can’t we?

The problem is not lack of regular jobs – it’s simply lack of jobs. You need investment to create employment. That’s the formula and it hasn’t changed. The harsh reality is that if government policies are anti-investor, the foreign direct investments are hard to come by. They usually flow to more investor-friendly destinations. Worse, even Filipino taipans with monosyllabic or tri-syllabic family names invest their wealth in other ASEAN countries for the same reasons that FDIs seek investor-friendly countries.

Build, build, build

A national newspaper quoted DPWH Secretary Mark Villar, “The prevailing mismatch between available labor and the skills required by the construction industry continues to be a headache for the government’s Build, Build, Build infrastructure program. The shortage of skilled labor continues to hound the construction industry, making the country’s golden age of infrastructure endeavor more challenging.”

The skilled and highly skilled laborers tend to go to the Middle East and other countries, where salaries are higher. According to POEA, some 6,000 workers go abroad everyday.

It will not be good to prevent these workers from going to where they will earn better pay. The idea is to make the Philippines the center of excellence in the development of skills needed here and abroad. This means establishing better training centers using world-class, modern, state-of-the-art training equipment and world-class trainers, Filipinos or foreigners. The social partners – government, private enterprise, and workers must cooperate to make the Philippines produce world-class workers for its need and that of the rest of the world.

Believe me, it’s much nicer to be known for highly skilled labor than for cheap labor. Let’s excel in the race to the top, not in the race to the bottom.

(Email: erniececilia@gmail.com)

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TAGS: gross domestic product (GDP), International Monetary Fund (IMF), weak peso
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