By Aubrey Rose A. Inosante, A reporter
The Philippines needs to make public spending more transparent and give more weight to industrial development to reach the upper middle-income country (UMIC) level, analysts say.
The road to UMIC status, the government’s long-stated goal, is now expected to face further delays, possibly to 2027, due to slowing economic growth, they added.
“Better transparency in public spending and strong industrial policy are the keys to achieving UMIC status,” said an economist at Oikonomia Advisory and Research, Inc. Reinielle Matt M. Erece BusinessWorld via Viber.
The scandal of corruption in infrastructure projects erupted after heavy rains in July, which exposed poor or non-existent flood control works. It resulted in the restructuring of the Department of Public Works and Highways, whose output became more scrutinized, reduced public spending and damaged investment confidence.
Mr. Erece also noted that the government may find it challenging to reach UMIC status unless GDP growth expands by at least 7%.
“Even if we can reach that level by 2026, we can only reach UMIC status by 2027,” he added, noting that this projection represents an optimistic scenario.
This will take longer than the government’s goal of achieving UMIC status by 2026. The Philippines has been classified as lower middle income since 1987.
“It will be quite a challenge to do that. (Economy Secretary Arsenio M.) Balisacan has already said that he would like to grow by 6 to 7% to have a strong chance of achieving that goal,” Sir Percival K. Peña-Reyes, director of the Ateneo Center for Economic Research and Development, said via Viber.
Finance Secretary Frederick D. Go said last week that he still hopes the Philippines can reach UMIC status by 2026, looking at the resurgence of the economy.
“Our strategy is to grow the economy and ensure that no one is left behind,” said Mr. Go told reporters on December 18.
The Philippines’ gross national income per capita will stand at $4,470 in 2024, up from $4,230 last year, according to the World Bank’s national income classification released in July.
The Philippines was $26 short of the $4,496 threshold to be reclassified into the UMIC category. The upper limit of the UMIC band is $13,935.
Securing GDP growth of up to 7% is unlikely to be achieved, as Mr Balisacan admits that the Philippines may not even hit the 5.5 to 6.5% target this year.
“If public spending continues to tighten, and many politicians continue to want to cut spending rather than improve transparency, GDP growth will continue to slow,” said Mr Erece.
Analysts have also put down the peso’s recent weakness as a potential risk to UMIC’s situation, but others say it could support exports, with incomes that further offset the currency’s devaluation.
Mr. Peña-Reyes said he sees the weak peso as a concern but noted that the central bank is intervening to stabilize the currency.
The central bank said it is intervening in the foreign exchange market to reduce the volatility of the peso, which it considers to have no target rate against the dollar.
“We don’t always intervene. We are shy about intervening. But if we decide to intervene, we are more likely to do it when the market goes crazy,” said Bangko Sentral ng Pilipinas governor Eli M. Remolona, Jr.
The peso has breached the P59-to-dollar mark several times since November and hit a record low of P59.22 in Dec. 9.
Mr. Go said that the peso could be one of the obstacles for UMIC since the World Bank’s classifications are set in dollars.
“Even if we grow in pesos, if the exchange rate of other countries opposes us, that is a problem,” said Mr. Go.
Mr. Erece said the depreciation of the peso is an economic risk, but he does not consider it a “major risk” to achieving the UMIC.
“A weaker peso may help boost export demand due to competitive prices, and OFW (Overseas Filipino Workers) remittances may also offset the falling peso,” he said.
A weak peso would make exports more competitive, Mr Erece said.
“Therefore, a strong industrial policy is also needed to develop the economy and create more jobs. If the government is worried about the high cost of importing goods due to the falling peso, a strong industrial policy is very much needed to build competitive domestic industries, which may even absorb some of the demand away from the goods,” he said.
The President of the Foundation for Economic Freedom, Calixto V. Chikiamco said that following the position of UMIC is not important, because it does not care how the income is distributed.
“The fact that a dynamic value such as an exchange rate affects a milestone underlines its structure,” he said. BusinessWorld via Viber.
Mr. Chikiamco said the UMIC reform is “nothing to celebrate and nothing to keep an eye on,” as it affects the country’s eligibility for cheap loans or international aid.
Obtaining UMIC status will mean that the Philippines will have reduced access to official development assistance from development partners.
