(Part 1)
A global recession this year and next year will not prevent the Philippines’ gross domestic product (GDP) from growing at the range of 6-7%, the upper limit being reached if consumption spending continues to expand because of above average increases in overseas Filipino worker (OFW) remittances and information technology-business process management (IT-BPM) earnings which can turbocharge domestic tourism, despite inflation rates staying at 5% during the first half of 2023, decelerating to 2-4% only during the second semester as a result of expert inflation targeting moves by the Bangko Sentral ng Pilipinas (BSP). That’s the good news.
The bad news is that the very high rate of consumption spending to GDP has caused domestic savings to crash to an abysmally low 9% of GDP. This is very bad news for our long-term growth prospects. With a dangerously high debt to GDP ratio of over 60% (compared to an average of 30-40% before the pandemic) domestic sources of long-term capital have practically dried up.
One telltale sign is that in the 2023 National Government Budget, which was efficiently passed by the present administration before the end of the calendar year, the percentage of infrastructure spending to GDP has dropped again to the low average of 3% characteristic of the Philippine governments before the Duterte administration that accomplished the historical feat of bringing that average to the desired 5-6% comparable to our ASEAN neighbors.
Equally worrying is the fact that the comparable percentages of spendings on education, health and agriculture — supposedly high in the priorities of this present administration — remain much below the ASEAN averages.
For example, the percentages of spending on education, health, and agriculture of our ASEAN neighbors average 5-6% in each of these vital sectors. In the 2023 budget, spending on education is only 3% of GDP, health an abysmally low 0.84%, and agriculture even a lower 0.44%. And all these coupled with our government talking about bringing our debt to GDP ratio from over 60% today to only a level of below 50% by the end of the present administration in 2028 because we have to continue borrowing to support the national budget, considering our very low rate of domestic savings.
In fact, we have fared very poorly in savings rate already for some time. During the decade preceding the pandemic, our domestic savings rate hovered from 15% to 20% of GDP, compared to the averages in East Asia of 25-35%. In 2021, when our domestic savings rate was at 9.2%, Singapore had 57.5%, China 45.7%, South Korea 35.7%, Indonesia 35.2%, Vietnam 34%, Thailand 29.8%, Malaysia 29.4%, Sri Lanka, 27.9%. Our very low savings rate is the elephant in the room!
That is why, despite all the valid criticisms hurled against the Maharlika Investment Fund, the Senate must find some way of passing the House No. 6608 bill, an Act Establishing the Maharlika Investment Fund. At the offset let me already suggest that it be renamed the “Philippine Long Term Investment Fund,” to drive home my main point that the greatest virtue of the law — if properly enacted following the laudable features of its present form that already incorporated the many valid criticisms by leading economists — is that it will be a major tool of the government to attract much-needed foreign equity that can supplement our very meager long-term investible funds in such critical infrastructure as airports, telecoms, railways, subways, data centers, national electric grids, large scale corporate farms, and many other capital-intensive investments needed by our country to graduate to a First World economy in the next decade or so.
Because of the dire straits in which our debt situation finds itself, it will take quite a while before we generate enough domestic savings to be able to fund the large investments needed to continuously improve our vital infrastructures, especially in transport, telecom, digital transformation, and agricultural modernization.
As a target, we should aim at attracting $15-20 billion in the form of foreign direct investment (FDI) annually. I got this figure from what Vietnam has averaged yearly over the last five years. Vietnam has been much more FDI-friendly than the Philippines over the last decade or so until our lawmakers were able to pass the amendment of the Public Service Act (PSA) which now allows foreigners to own as much as 100% of local businesses, not only in high capital-intensive infrastructure but also in retailing and medium-scale enterprises.
Already the more favorable climate is attracting greater amounts of FDI, despite the gloom that descended on the whole world because of the Russian invasion of Ukraine. In 2021, still a year under the dark influence of the COVID-19 pandemic, the FDIs that flowed into the Philippines reached $10 billion. With all the airports, railways, subways, telecommunications facilities, data centers, renewable energy plants, and other critical infrastructure waiting to be built for us to reach the Ambisyon 2040 target of the National Economic and Development Authority (NEDA), an annual flow of $20 billion in FDI is not an unreasonable goal. In an investment forum in Palawan, I heard the Ambassador from Denmark reporting that a Danish group is interested in ploughing $2 billion into a solar project in the Philippines.
All these possible FDIs will be facilitated if there is a vehicle for the foreigners to partner with a government agency to be their local counterpart to help them deal with the peculiarities of investing in the Philippines. Although the PSA allows 100% foreign ownership of major infrastructure, it is very predictable that foreigners would elect to have a minority share to be owned by a domestic institution. What better partner to “hold their hands” than a government fund?
An editorial that appeared in one of the major local newspapers hit the nail on the head when it made the following comments about the “Maharlika Fund”: “If managed properly, such a fund could also be used to bring in more investments into the country by serving as a big brother for foreign capitalists who have the cash but are unfamiliar with the local business landscape. In fact, ‘handholding’ is a role embraced by sovereign wealth funds of other countries (more than 40 of them), many of whom regularly partner with foreign businessmen in investing in the local scene. Wealthy investors from abroad will be much more comfortable in navigating often treacherous Philippine waters if they have the reassurance a government entity like the Maharlika Fund is their co-investor in, for example, a massive telecommunications project or a new critically needed highway.”
I am glad to notice that at the World Economic Forum, President Ferdinand Marcos, Jr. already has been explicitly saying that the Maharlika Fund will be tweaked so that it can be tailored fit to the specific need of the Philippines, which, in my opinion, must be almost exclusively focused on infrastructure projects.
Section 13 of Article IV of H. No. 6008 that lists the allowable investments must highlight infrastructure in transport, telecommunications, sustainable energy, and data centers as well as large agribusiness ventures (nucleus estates farming, agro-industrial zones, cold stores, etc.). What was listed last should be mentioned as the first field of investment: “Loans and guarantees to, or participation into joint ventures or consortiums with Filipino and foreign investors, whether in the majority or minority position in commercial, industrial, mining, agricultural, housing, energy, and other enterprises, which may be necessary or contributory to the economic development of the country, or important to the public interest.”
(To be continued.)
Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is professor emeritus at the University of Asia and the Pacific, and a visiting professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.