MY TWO CENTS’: Why the ADBs growth numbers are tough to dispute (part 1)

The business press is abuzz over the recently released Asian Deevelopment Bank (ADB) report that paints a “golden age” of Philippine infrastructure complete with impressive growth forecasts for the Philippine economy.

In its new Asian Development Outlook (ADO) 2018, ADB projects Philippine gross domestic product (GDP) growth at 6.8% this year and 6.9% in 2019, up from 6.7% in 2017. Rising domestic demand, remittances, and employment, in addition to infrastructure spending, will drive growth. This is almost 8 points higher than the rest of Asia, besting its peers and putting the country at the spearhead of regional growth.

These numbers are difficult to dispute because the Philippine governments moves and efforts reflect the ADBs numbers. Infrastructure spending is up to 7.3% from about 4% a year ago, a far cry from past governments measley spending. This is the proverbial money. where the mouth is- to put cash where promises are made.

More than keeping political capital high, this spending also creates employment and drives up consumption that helps keep growth high. This is classic pump priming of the economy, as government spending remains a key driver to growth. Government, especially in developing countries, still has the deepest pockets, making it the biggest spender. When it moves, the economy reacts.

What  is also clear is that this is a consumption driven growth, and one of the factors that show this is the inflation figures, that have been rising even before TRAIN went into effect.

Note that the inflation figures are but a bit above ASEANs average inflation, and remain within levels that still allow the Bangko Sentral to intervene by increasing benchmark interest rates to mop up excess money that is used to increase demand of consumers outstrips supply of commodities, leading to temporary increases in the inflation rate.

When the interest rates are increased, there is less money being borrowed, tightening the supply of money that in turn, keeps inflation in check. Note that in South Asia, inflation rates are nearing 10%. Thus, we in southeast asia remain within manageable levels. This is not the runaway inflation that people fear, since this is bred by increases in sin products that people still buy, and global oil prices.

As we have said before, inflation is a rate that increases and decreases over time. What it means is that when supplies of goods adjust upwards, prices will ease and inflation will go down as it did three years ago. Even the ADB predicts this will go down to 3.9% in 2019.

 

What remains to be done are two major items: increasing agricultural productivity to lower food prices, and push electricity rates down. With increased power generation, government should look into ways by which this cost is gradually lowered while keeping plants efficient.

In terms of agricultural productivity, the 4% increase in agriculture is a good start, but we need to ramp this up further so that it will have a dent on food prices. Here’s a tip: start by dismantling the cartels that keep prices artificially high. Let the higher supply come in.