Highlights of the Knowledge Sharing Forum on Global Uncertainty: Regional Headwinds and the Philippines Economic Promise
The forum held last July 20, 2017 at Rooms 1 and 2 of the Ramon V. Mitra Bldg., House of Representatives and organized by the Congressional Policy and Budget Research Department, sought to gauge the sustainability of the country’s economic growth amidst global uncertainties. Issues discussed include protectionist measures by the United States’ new administration, the Eurozone’s skeptical surge, deceleration in the growth of China due to a rebalancing of its economy, among others. The resource person for the forum was Dr. Dan Steinbock, a global economic and policy expert who is also the founder and CEO of Difference Group, an advisory body that offers services to multinational companies, financial institutions, marketers, government agencies and municipalities, NGOs, and international organizations.
In his opening message, Director-General Romulo E. M. Miral of the CPBRD stated that the knowledge sharing forum is very timely considering President Duterte’s second State of the Nation Address and the submission of the 2018 national budget to Congress. The budget is an important policy tool that helps attain the government’s socio-economic objectives of accelerating growth and reducing poverty. However, achieving growth and sustaining economic expansion are two separate goals and the Philippines has been facing difficulties over the years in achieving the latter because of the boom and bust cycles. Based on the country’s past performance, economic growth is usually accompanied by higher budgetary and current account deficits.
Considering the inadequacy of domestic savings, these deficits are then accompanied by increasing foreign borrowings and dependence on foreign capital. Philippine economic growth is associated with the amount of foreign capital available which is usually in the form of foreign direct investments or portfolio flows. While there were notable reforms implemented during the past decade, it is important to also closely monitor the global economic situation. The lecture of Dr. Steinbock is therefore crucial as it can help policymakers and technical staff of the House of Representatives better grasp the opportunities and challenges faced by the country in order to put the Philippines in a better position to weather these risks.
Dr. Steinbock started his presentation by saying that the Philippines is faced with extraordinary challenges amidst an exciting global environment which includes protectionist threats from the United States, uncertainty in the Gulf Area, and the deceleration in China’s growth, among others. These global challenges are more difficult compared to those in 2007-2008. He also added that the 2008 global crisis had similar patterns in different regions. Debt from the private sector during this time has been steadily delegated to the public sector due to various monetary policies like quantitative easing and zero interest rate policies. The printing of money has created a semblance of stability in the global economy. However, this is far from stability that is grounded along basic fundamentals.
The sense of recent optimism stems from the idea of seeing something new which includes higher levels of inflation especially in advanced economies which signal recovery from the global economic slowdown. However, the expectations in recovery might be temporary as quantitative easing is still implemented by other countries. The levels of inflation presently observed is the result of massive monetary injection and ultra-low interest rates. The United States is poised to move away from the low interest rate regime due to the continued recovery of its economy.
Notwithstanding this recovery, the US still needs to formulate a credible, bipartisan, and medium-term debt cutting plan. Delays in the US debt plan is expected to create political uncertainty and volatility in the markets. These developments have put the United States among the countries considered as global risks based on the Fragile States Index. Dr. Steinbock also explained “hot money trap” which is a situation wherein the “easing” in advanced economies easily create imported inflation, currency appreciation and asset bubbles, in the case of emerging economies.
The present situation in the Eurozone is quite the opposite as interest rates keep on rising. What is more troublesome in the Eurozone when looking at fundamentals are in terms of failed fiscal adjustments, liquidity, banking crisis, and the decline in competitiveness and innovation. He stated that China allots 2.1 percent of its GDP into research and development (R & D) which is higher than that of the Eurozone. Dr. Steinbock added that investments in R & D, innovation and increase in productivity are crucial factors towards improving living standards.
There seems to be a level of misunderstanding of Japanese monetary policy in the Eurozone according to Dr. Steinbock. The objective of Abenomics was simply to have real and fundamental inflation which in turn created massive monetary injection. This is two or three times more than the impact of the Fed’s action during the 2009-2010 crisis. However, inflation in Japan was still close to zero. Concerns raised by Dr. Steinbock include the Bank of Japan being currently one of the major shareholders in leading Japanese companies which undermine the market-led growth.
For China, concerns continue to linger with regard to its rising debt levels. In particular, the government is currently taking credit twice as much as the growth in GDP in the last 2-3 years. This specifically escalated in 2009 when China was implementing a stimulus package to fund vital infrastructure. Economists, such as Nouriel Roubini, noted that China is perhaps moving too fast towards monetary tightening which has counterproductive implications.
For the first time since 2009, Dr. Steinbock offered an optimistic view of the Philippines with the election of a new administration. He lamented that most of the reforms enumerated at the start of the Aquino administration were not implemented. These include relaxation of investment restrictions which are critical for foreign investors and businesses. Dr. Steinbock projected the Philippines to grow by 6.4 percent to 6.8 percent until 2022. He also predicted that the Bangko Sentral ng Pilipinas would move towards implementing two hikes this year but would still depend on the actions of the US Fed.
Key Global Issues
Dr. Steinbock noted that global trade started to plateau beginning in 2015 and has also showed signs of slowing down. While there are noted recoveries in world investment, the fundamental levels are still behind the peak year of 2007. This is notwithstanding the increase in population during the last ten years which thereby translates to increased global demand. Migration has also stagnated especially in developed economies.
Globalization is therefore at a crossroad. This was particularly magnified by the election of Donald Trump as President of the United States due to his pronouncements of adopting a more protectionist stance. There is a seeming disregard by the US government for fiscal expansion. While the Trump administration has put in place a $1 trillion infrastructure spending plan, this will largely depend on the resolution of the contradiction between the Federal Reserve and the federal government. In particular, President Trump expects a low interest rate regime for the government’s fiscal expansion plan which is the opposite of the Fed’s intentions of gradual rate hikes.
Trade policy is another area where changes are expected to happen. Steel, in particular, has caught particular attention in this regard due to issues of national security. Mr. Steinbock concluded that the world is now under the shadow of an international trade war between the United States and China with steel as one of the primary commodities involved. The United States is then poised to make use of deficit-targeting import tariffs. Tax policies are also expected to be implemented by President Trump in order to “re-shore” companies’ operations and profits back to the United States. The opposite can be observed with that of China as it intends to foster globalization through the “One Belt One Road” plan. Dr. Steinbock expressed fears that the Philippines might be left out in all these developments particularly on investments. On the proposed free trade plans such as the Trans Pacific Partnership and the Regional Comprehensive Economic Partnership, among others, Dr. Steinbock suggested not leaving out either China or the United States and the ASEAN bloc in any new agreements as these offer opportunities that are more inclusive than before.
Outlook for the Philippines
In order to move the country forward, Dr. Steinbock suggested the following courses of action. First, the Philippines needs to accelerate investments particularly in infrastructure (transportation, power, among others) and industry which should come not only from foreign sources but also from the domestic market. Investments in industry will also usher the industrialization phase which the Philippines failed to undergo in the past two or three decades. Foreign investment legislations would also have to be changed. Second, there should be an economic rebalancing as well as regional rebalancing of income away from Metro Manila. Dr. Steinbock found that the income levels in NCR are seventeen times that of ARMM. He also pointed out that the country’s GINI coefficient, which measures the degree of income inequality, as being the highest in ASEAN. He cited the case of Brazil which grew rapidly and reduced income polarization. Dr. Steinbock further highlighted the economic development model of Singapore in the era of Lee Kuan Yew wherein the right to basic housing was ensured so that its citizens would have a sense of nationhood.
Dr. Steinbock posited that he sees bright investment prospects for the Philippines as indicated in the World Investment Report which identified the country as among the top ten investment destinations. Foreign executives also pointed out the various construction of malls and other similar structures in the Philippines as essential fundamentals for growth. The United States plan to impose additional tariffs would negatively affect the Philippines. Investment levels would generally depend on the swift amendments to certain legislations and policies on foreign equity limitations. Transparency will also play a crucial role.
The threat to remittances meanwhile is dependent on factors that are mostly out of the country’s control such as the recent events in the Gulf Region. President Trump’s tightening of migration policies can also negatively affect deployment and remittances. However, Dr. Steinbock cautioned that heavy reliance on remittances cannot bring the Philippines to the level of BRICS economies in the long-run as the country is effectively exporting its middle class to other countries along with the associated multiplier effects to the local economy. The country cannot afford to have an international dispute with China. Dr. Steinbock further commented that no advanced economy or major power has ever honored any decision of international tribunals. He compared the country’s victory in the tribunal as “supportive decisions” but translating these to enforceable practices will be another issue.
The continued historical insurgencies in Mindanao was basically caused by continued political, economic, religious and ethnic inequalities. It is therefore important to integrate Mindanao with the attendant economic activities of the whole country. However, the integration of Mindanao and other similar conflict-affected areas are not enough and the country still needs to pursue federalism or similar reforms similar to those of China, Brazil, India, and Russia, among others.
Dr. Steinbock concluded his lecture by projecting that the Philippines will grow as high as 7.0 percent to 7.5 percent in the medium term assuming that the positive trends continue. On the other hand, he projected a low-end growth of 6.0 percent or less.
The following queries and issues were raised by the participants: On foreign investment restrictions
Ms. Janna Sheng-Olladas of the Committee Affairs Department (CAD) shared that there are proposed legislations that seek to ease foreign equity restrictions such as the Amendments to the Public Services Act, Amendments to the 1987 Constitution, and several bills that seek to promote innovations among industries similar to those of Singapore. She also inquired whether President Trump’s pronouncements of slashing corporate taxes down to 15 percent would somehow intensify the so-called “hot money trap.” Dr. Steinbock replied by stating the importance of easing foreign ownership, issues otherwise the country will miss out on the benefits of globalization. On the “hot-money trap,” there are concerns that this decision would affect emerging markets if such policies have long-term objectives.
On the impact of protectionist actions to ASEAN
Director Novel Bangsal of the CPBRD inquired as to the possible impacts of protectionist policies on the ASEAN region considering the said region’s drive for more global integration and sustainable development. Dr. Steinbock explained that some of the policy pronouncements of President Trump before his election are no longer consistent when he took office. This implies that as long as the external pronouncements are contained, these would not have an adverse effect on ASEAN economies particularly on the Philippines due to the country’s great domestic potential. He also added that countries should instead focus on infrastructure and innovation.
On the emergence and legitimacy of cryptocurrency
Ms. Jen Ramos of CAD raised the emergence of crypto currency as an innovation and whether this will have an impact on banks and monetary agencies in other countries that lack the necessary regulations. Dr. Steinbock responded that if China or India continues to ban the use of cryptocurrency, then this innovation will experience difficulties of finding its way towards the global financial system. The lack of regulations on cryptocurrency also exposes it to abuse such as speculation and stock-boosting, among others.
On China’s de-leveraging, exchange rate, and the possible liberalization of derivatives
CPBRD Executive-Director Manuel P. Aquino asked about the implications of China’s de-leveraging and the possibility of approaching a Lehman-type scenario and its possible implications to emerging Markets. While these scenarios have been raised as early as 2002 by numerous economists, Dr. Steinbock surmised that these have somewhat been too ideological. However, these do not mean that China will not encounter these problems at all. Specifically, Dr. Steinbock expressed much concern about China taking credit twice as much as it is growing. He also identified other issues like the government’s seeming disregard of the markets. He further added that the chances of a Lehman-type scenario are remote due to lessons learned from the fallout in financial markets in recent decades. On the liberalization of derivatives, Dr. Steinbock commented that the markets typically discipline itself. Developing systems for this type of instrument should be subject to government regulation.
On the possible ramification of President Duterte allowing the group Kadamay to take over unoccupied public housing units
While Dr. Steinbock did not directly reply as to whether the President’s decision to allow the takeover is justified, he noted that the public “takeover” of federal apartments also happened in advanced economies. Countries can always learn from the experiences of other economies and calibrate them with present realities or experience the crisis by themselves.
On the critical policy and structural reforms for the Philippines
CPBRD Director Romulo E. M. Miral inquired on the opportunities and challenges as well as the needed policy and structural reforms that should be undertaken by the government. Dr. Steinbock stated that the present administration is currently poised to carry out transformative policies. However, this has the possibility of creating backlash effects. For infrastructure, legislative changes are surely necessary and this has to be the top priority. In the case of Singapore, it experienced difficulties moving to the next stage of development until it recognized the importance of infrastructure development. Funding as well as political consensus for infrastructure development is crucial. Dr. Steinbock also raised concerns about the seeming job-skills mismatch in the Philippine labor market. In particular, there is an insufficient number of employment opportunities that matches the talent and skills of the country’s workers/professionals. It is important to foster economic inclusion in order to avoid the income polarization that exists in the country.
On regional rebalancing, it is important for a country to have a sense of nationhood as this is one of the more important ingredients present in every industrialized nation. Dr. Steinbock commented that there are other regions in the Philippines that feel disconnected and lack a sense of nationhood. Income polarization is one of the factors that caused this lack of nationhood.