Philippines economy is in a ‘Goldilocks situation’

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Diwa Guinigundo, the deputy governor of the Philippine's Central Bank, talks to Asia Times. Photo: Asia Times

Diwa Guinigundo is not your typical banker. The deputy governor of the Central Bank of the Philippines, or Bangko Sentral ng Pilipinas (BSP), crackles with optimism when he talks about the country’s finances.

Interviewed by Asia Times in his BSP office on the state of the economy and the prospects for next year, Guinigundo says that 2017 has been a “watershed year for the Philippines’ economy.”

A graduate from the London School of Economics, the 39-year-old is direct and to the point. A refreshing quality.

“We are not a popcorn economy,” Guinigundo says. “We have grown for 75 consecutive quarters even through the Great Recession of 2008.”

To underline the message, he points to low inflation and high growth. He also stresses that the Philippines is now a middle-income level country, although it is at the lower end of the spectrum.

The World Bank defines as middle-income a nation with a GDP of between US$1,026 to $12,615 per capita.

“The Philippines is in a Goldilocks situation,” Guinigundo says. “We have low inflation at 3.2% and high growth at 6.9%. We can sustain high growth.”

Next year, he expects the economy to grow by 6.5% to 7% with inflation hovering around 3.4%.

He also insists there are policies in place to cope with any economic headwinds. “The Balance of Payment is manageable and there are sufficient buffers for external events,” Guinigundo says.

His main concerns revolve around geopolitical risks, but he adds that the macro economic fundamentals are strong enough to absorb any shocks.

Even looming tax hikes on fuel, cars and other consumption goods fail to cloud his blue-sky picture, arguing that the Philippine’s economy can weather inflationary pressures.

In a strong statement of intent, he talks about how public and private sector investment will help drive growth until 2022, and says that potential output has moved from the 4-5% range to the 7-8% level.

“The Philippine economy is running on all six cylinders,” he says, adding that he is not fazed by a potential further strengthening of the US dollar.

“Even if US interest rates go to 2% next year, they will remain below the Philippines policy rate of 3.0%,” he points out.

And, as importantly, pass-through inflation from a depreciating peso is low: “A 1% depreciation in the US dollar exchange rate at one point in time led to a 0.42% increase in inflation. Now, our models show that the impact has been reduced to just 0.16%. A lower peso does not add inordinate inflationary pressure.”

Guinigundo is also quick to state that the BSP has more flexibility than in the past to deal with possible external shocks.

Yet there could still be dark clouds just beyond the horizon. Guinigundo admits that rising fuel prices could increase electricity costs. That will be bad news for the Philippines economy as electricity prices are already the highest in Southeast Asia.

He also says that the tax reform package will not generate as much revenues as initially envisioned by lawmakers, although this could possibly be covered by domestic borrowing.

“But the real challenge for the Philippine economy is trying to steer clear of the middle-income trap, as well as addressing the country’s massive infrastructure bottlenecks,” Guinigundo emphasizes.

He highlights the problems affecting the major road, which runs through Metro Manila, as a prime example. “Look at the horrendous traffic on EDSA (a main traffic artery). People are caught in traffic for two to three hours. You cannot grow by 7, 8, 9% with that,” he says.

Another challenge for the monetary authorities is boosting credit options for the country’s emerging middle class.

Still, the tenor of the whole interview with Guinigundo is about his confidence in long-term growth. Despite political friction, there is a distinct feeling that the wheels are moving in the right direction.

While the country’s business style might be chaotic, the Philippines has great potential, especially when it comes to the demographic dividend.

As I returned to Makati, the road was in gridlock. Cars, trucks and buses funneled into one of those “bottlenecks.” Well, no one said the road to riches would be traffic free.

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