MY TWO CENTS’ – Financial ratings good but inclusive growth still slow (Part 1)

As we have noted several columns ago, Fitch, S&P and other international ratings agencies have consistently upgraded our financial ratings and have largely kept them at an investment grade of BBB or similar levels. These ratings set the benchmark for other moneylenders to also lower their interest rates when lending money to prospective businesses in the Philippines. This bodes well for the entry of foreign direct investment, and improves our overall business climate to encourage even local businesses to expand since it generally becomes easier to borrow funds needed, and at cheaper rates. The growth is felt in the rise in private infrastructure spending in Metro Manila, and major cities like Cebu, Cagayan de Oro and Davao, where many empty lots are now teeming with construction activity, building new structures and renovating or refacing old buildings. Already, OFW remittances, while increasing, already contributes a lower share of national GDP than it used to. Manufacturing as a share is going up. This can mean that there are slightly more jobs generated at home than before.
This rise of other industries at home is a trend that must continue, as it enables us to grow even more. OFW spending on housing, appliances and other needs can only bring us to a certain point in our growth, after which the development will plateau. Sustainable growth needs for us to make things from our country, and sell them at home and abroad. The higher the value of goods we make, the better for us. Korea is one example of a war torn, damaged country to an industrial power. Malaysia and Thailand are not far behind. These three countries are heavily encouraging manufacturing investments as a core driver of their economic growth.
What is noted, however, is the low per capita income of the Philippines at $2,836 in 2014 compared with the compared to other countries ‘BBB’ median of $10,654. While this should not be an immediate problem, the further increase of our financial ratings can only be sustained if the economy is more equitable, meaning, that the per capita income, which is the income of individuals and their families, goes up. Lower income means less capability to purchase needs and wants from the market. But when per capita income goes up, people buy products made by local suppliers, who employ more workers and subcontractors, who in turn buy more from others, and so on. Over all, the pie of growth gets bigger, and everybody goes up with more earnings and a better quality of life.
This is especially important in areas where agricultural activity is the main source of income. Farmers need more people to buy their produce, and this encourages them to plant more or increase productivity, which in turns moves more people to go into farming even in small plots to meet rising demand. This allows more farmers to earn more per hectare, while stabilizing pricing of commodities such as rice, vegetables and meat. Of course, pump priming agriculture to soften pricing shocks may be needed, but that’s the topic of another column.