Old and new drivers of growth
July 18, 2011 at 20:05
To achieve its “fighting target” of 7-8% growth per year under its term, the new administration is betting on a few key initiatives and the continued success of some traditional growth drivers. Chief among these are public-private partnership (PPP) schemes, improved governance, a vibrant tourism sector, an expanding business process outsourcing (BPO) industry, and robust overseas Filipino remittances.
Extending the betting metaphor, we may classify these prospective growth drivers, at least in the near term, into three groups: the sure thing; the long shot; and those that could go either way. We discuss each below.
BPO. The BPO sector is the sure thing. The sector is now second only to India’s in size, and more recently exceeded India’s in growth. Industry experts project its export revenues to reach US$25 billion by 2016 from $9 billion last year — a very attainable annual growth of 14.5% — on the assumption of a benign external environment and continuous supply of skilled labor. By 2016, the sector is expected to directly and indirectly employ 900 thousand workers, to indirectly create employment for 2 million others, to equal the contribution of remittances to GDP, and to have gradually shifted to non-voice and other higher-end services.
The feared shortage of qualified workers is not binding in the short term. More than a fifth of the country’s 3 million unemployed are college graduates — and more graduates are expected to remain in the country given unfavorable foreign employment conditions. In addition, some colleges and universities now offer courses that are tailored to fit the needs of the BPO industry.
Tourism. The government is positioning tourism as a future major revenue source, targeting 3.7 million foreign tourists this year and 6.3 million by 2016. Some headway has been made, most notably the liberalized air policy in secondary airports and the increased number of budget airlines offering direct flights to the country. Longer-term are plans to build international airports via PPP projects in Albay, Bohol, Palawan, and Cagayan de Oro City.
Still, the foreign tourist arrival growth target is a long shot, as it has been flat at about 3 million in recent years. This year tourism was harmed by the isolated but much-publicized tragic death of tourists from Hong Kong in a botched hostage situation in Manila last year and recurrent travel warnings to the Philippines issued by the US. A recent World Bank report identified lack of accommodation, food culture, lack of a brand name, geographical isolation, poor business climate, and high energy costs as additional constraints to the sector.
Remittances. Remittances is a sure thing in one sense — its level will remain high. But it can be expected to grow at modest levels over the near term, given unfavorable conditions in major OFW destination areas, which will dampen earnings of existing OFWs and growth of potential remitters. The POEA projects deployment to decline by 5-6% this year. The purchasing power of remittances is also hampered by the strong peso. For the first four months of 2011, remittances in dollars rose 6%, but in peso-terms advanced only 1.3% — implying a decline in purchasing power.
The critical issue about remittances — almost $18 billion last year — is not growth but its use. In recent years, national savings have far outstripped domestic investments — meaning, the resources for investments are available, they are just inefficiently utilized. According to BSP, the country had a current account surplus, equivalent to 4.2% of GDP last year and has been running a surplus since 2003.
PPP. The PPP scheme is off to a rocky start, with most projects lined up facing delays. The previous administration failed to invest in building a project pipeline, and the mostly unsolicited projects now in the pipeline have been put under scrutiny by the current administration. This is exacerbated by lack of technical capacity in planning and implementing agencies, a problem the government hopes to address using grants totaling $27.5 million from donor agencies for such purpose.
The desire for “quality at entry” implies the program will move slowly in the beginning. On the bright side, if the government succeeds in institutionalizing watertight contracts, supposing it first solves capacity problems, the longer-run outlook for investments will be better. For this year, the PPP goals are unlikely to be met, but going forward, the PPP may still take off, depending on how quickly and well the administration beefs up its technical capacity, establishes proper regulatory and institutional framework, clarifies the rules of the game, and instills investor confidence.
Governance. The government record on governance and governance reform has been net positive, scoring points by exposing malfeasance in the previous administration, passing a law institutionalizing improved governance of GOCCs, and filing some high-profile tax evasion cases to improve tax compliance. On the negative side, the government has been seen as flip-flopping on some key issues (e.g., the NAIA-3 case), the Palace seen as occupied by squabbling factions, and the President criticized as unduly influenced by old friends and failing to provide clear directions. Some reform efforts have resulted not only in delays but at the added cost of shaking investor confidence in the government’s commitment to honor contract obligations entered into by the last administration (e.g., RORO project with a French company and dredging project with a Belgian company).
Many governance challenges lie further ahead, and not just for the executive department. One such is the problematic ruling of the Supreme Court on the extent of foreign ownership in the case of PLDT. Another is the current bill in Congress seeking to create a water regulatory commission, which threatens the existing concession arrangement between the government and its concessionaires Manila Water Company and Maynilad Water Services, arguably the most successful PPP project in the country so far.
Although they hold potential, the designated new engines of growth are unlikely to pay off in the short term: the PPP has a slow start; tourism faces myriad challenges; and some governance reform initiatives have the unintended consequence of keeping investors wary. The Philippines still has to rely on its traditional growth drivers — the BPO sector and perhaps remittances if properly utilized — and will likely chug along at the 5-5.5% growth pace up to next year.
Note: This is a summary of the July 11 Global Source Monthly Report prepared by the author and Geoffrey Ducanes. Mr. Romeo Bernardo is GlobalSource Philippine advisor, managing director of Lazaro Bernardo Tiu & Associates, and board member of the Institute for Development and Econometric Analysis, Inc.
To view the original article by Romeo L. Bernardo on BusinessWorld Online, click here.
