OFW dollars fail to spur Philippine economy

this story was taken from www.inq7money.net

NEWSFEATURE

OFW dollars fail to spur Philippine economy

Posted: 4:57 AM Dec. 12, 2005
Daxim L. Lucas
Inquirer

Published on Page B12 of the December 12, 2005 issue of the Philippine Daily Inquirer

IN HIS LONG YEARS AS A GOVERNMENT economist, Economic Planning Secretary Augusto B. Santos said the dollars sent home by expatriate Filipinos have never played such a significant role in the economy as they do now.

Indeed, while the growth rate of local economic output slowed to 4.1 percent in the third quarter of 2005, the entire economy--including remittances from overseas Filipino workers--grew by a staggering 6.5 percent in that same period.

"This is the biggest gap [between gross domestic and gross national products] I've seen in recent economic history," Santos said in an interview. "I can't remember it being this wide before."

The latest economic numbers has Santos worried.

He pointed out that the local economy has two faces--and they couldn't be more different from each other.

One aspect is the financial sector, which has been giving off encouraging signals in recent weeks, with the strengthening of the peso against the dollar and declining interest rates since the passage of the value-added tax law. The other aspect, however, is more ominous, showing a sharp deceleration in the real economy's growth rate.

While the peso has strengthened to above the 54:$1 level and the 91-day treasury bill rate continues to decline, official GDP numbers released last week disappointed many economists and analysts. Many of them were counting on the government's predictions of third-quarter growth to exceed 5 percent.

Obviously, the danger is that gains in the financial sector may delude the policymakers and the broader public into believing that all is well with the Philippine economy.

Unproductive OFW money

According to Santos, dollars remitted by overseas Filipino workers have simply caught government planners by surprise, including economists at the central bank.

"There is simply a lot of money going around," he said.

The money sent home by more than five million Filipinos living and working abroad--in excess of $10 billion expected this year--has traditionally been credited for keeping the local economy afloat.

According to Santos, however, the latest GDP numbers showed that OFW dollars have not exactly been used to lubricate the wheels of the economy.

"All indications point to the fact that these funds are not being spent by the OFWs' families," he said. "Instead, they are just saving it in banks."

With the country often being criticized for having one of the lowest savings rates in the region, one would think that a sudden desire to save is a good thing.

Not so, said Santos.

"They have to spend this money to help the economy move," the National Economic and Development Authority chief pointed out. "The fact that they're saving their money doesn't help in expanding the Philippine economy."

Policymakers are at a loss over how to explain Filipinos' sudden desire to save, when they even had to encourage people--especially relatives of OFWs--to be more conscientious about their spending patterns only a few years ago.

But economist Cayetano Paderanga Jr. thinks he knows why Filipinos have become gun-shy all of a sudden when it comes to spending.

"All the polls tend to show that there isn't enough confidence [to spend]," he said, citing the behavior of both large firms as well as individual consumers. "Everybody's scared to spend."

Data from the National Statistics Coordination Board showed that the value of the country's local economic output (GDP) hit P1.32 trillion in the third quarter of this year.

When one includes income from abroad, the GNP swelled to P1.44 trillion, a difference of P119 billion--the largest in history--composed mainly of dollars sent home by expatriate Filipinos.

This amount, known as the "net factor income from abroad." has practically doubled from levels seen as recently as the first quarter of 2003.

Paderanga, who helped steer the economy as President Aquino's Neda chief, said that these dollar inflows have helped stabilize or even strengthen the financial sector, but has hardly helped anything else.

"The rest [of the economy] is not moving," he said. "The supply side of the economy is simply not responding to the liquidity that is available."

Return to 'pump-priming'
Neda's Santos thinks the problem lies in the fact that there are not enough investment opportunities available to OFWs and their relatives.

The challenge, he said, was for the government to create vehicles for investments that would attract OFW money into "more productive uses."

He said Filipinos must learn to become more entrepreneurial and put up businesses that would create jobs and further generate consumption, rather than just be content living off dollars sent home by their relatives.

To do this, however, he believed that government must put its money where its mouth is.

"Consumer confidence is low," he said, comparing the local situation to that of Japan in the mid-1990s where low confidence made the economy shrink despite it being one of the world's wealthiest nations. "There's fear and hesitation."

According to Santos, economic managers met recently to discuss this phenomenon and plan ways that would allow the country to sidestep the economic stagnation trap.

The solution?

"The government will pump-prime the economy, so people will also start spending," he said.

Pump-priming is the method by which the state jump-starts a sluggish economy by initiating a chain of spending that will help create more jobs, greater consumer demand, and eventually higher growth rates. Pump-priming has largely fallen into disrepute in the local context after the Estrada administration tried--and failed--to revive an ailing economy through profligate spending, resulting in deeper fiscal crisis.

Unlike the late 1990s, however, Santos believed that another round of pump-priming was justified given that state finances were in better shape with the recent passage of the VAT law.

In addition, Santos felt that the government "overdid" its austerity measures, with many agencies failing to spend for even their programmed activities this year.

"Sumombra naman tayo sa tipid (we were saving too much)," he said.

The Neda chief said that government spending next year--with an additional P200 billion allocated for infrastructure--would create a positive "contagion" effect, and prompt more people to spend or invest, rather than just save, their money.

Dangers remain

Many observers, however, remain cautious about the government's plans.

According to University of the Philippine professor Dante Canlas, a sustained recovery depended a lot on the credibility of the Arroyo administration's fiscal program.

Canlas, who served as Neda chief during President Macapagal-Arroyo's first term, said planners must take care not to squander economic gains by neglecting "hidden" expenses like subsidies to bleeding state agencies.

He was also worried that perceived gains on the financial sector would erode the government's desire for fiscal reform.

"There are some disturbing signs," he said. "Some mitigating measures will dissipate the positive factors."

He also pointed out that there remains up to $8 billion worth of stranded costs for National Power Corp., along with other state subsidies, which might set back the fiscal program further.

The government is hoping that early gains in the financial sector would spill over into the real sector in the form of higher confidence. But failure to address this would likely erase gains in the financial sector and reinforce the weakness in the real sector of the economy, Canlas warned.

"Positive sentiment depends very much on whether we can have sustainability on the fiscal side," he said. "The market is watching."

Without sustained reforms, Santos, Paderanga, and Canlas--current and former Neda chiefs--agree that financial sector gains will remain illusory and elusive for most Filipinos.