ANALYSIS: Growth driver runs into speed bumps

Jose Galang — Your Business

Posted at Jan 05 2018 07:16 PM

A slowdown in household spending amid increased rates of price increases and financing costs could threaten to spoil the optimistic outlook for the Philippine economy in the new year.

The much-applauded tax reform program, passed late last year by Congress after getting mangled in the two legislative chambers, will likely benefit the rich and upper middle-class households whose earnings are high enough to withstand the effects of the impending tax increases.

For most of the Filipino households, the exemption of their modest earnings from personal income taxes will not be sufficient to shield them from the effects of the new excise taxes on almost every product they consume and essential services they avail of.

The Duterte government’s economic managers claim that the tax reform program will “put more money in the pockets” of Filipino wage earners—but they are silent on the observation that the same tax program will also puncture the same pockets.

Note that even while the broad-based tax increases have already taken effect but the promised exemptions on personal incomes will be implemented starting in 2019 yet. Pay now, enjoy (if you can) much later.

If it is true that more taxes are being collected to pay for the government’s extravagant infrastructure projects that will most likely be undertaken by contractors from China, then the tax reform program will succeed in taking more money from Filipino households and sending this money to China.

A weaker growth pacer

Household consumption has been the main driver of economic growth in the Philippines for many years now. Thanks to the estimated $22-24 billion remitted yearly by Filipinos working overseas and to the earnings from business process outsourcing operations, a robust growth in consumer spending has raised living standards of many families and also spawned the rise of new business enterprises and industries.

But in 2017, when purchasing power was weakened by an accelerated pace in price increases and the drop in the peso value against other foreign currencies, there was already a palpable weakening of household consumption.

As of September last year, household consumption contributed 56 percent of national income in real terms. Not only was this slimmer than the 56.6 percent share in the year-before period, the growth rate fell to 5.4 percent from the year-before 7.3 percent.

This drop in household consumption growth was also accompanied by a slump in the government consumption growth at 5.3 percent from the previous year’s 9.6 percent. Government consumption accounted for 9.2 percent of national income in the said period last year, which was virtually unchanged since 2015.

Capital formation, an indicator of hard government investments in the economy, moved up by only 8.6 percent as of September last year, a sharp decline from 27.7 percent in the January-September 2016 period.

The newly imposed excise taxes on a range of basic commodities and services cast a dark cloud over prospects for household spending in the coming months. In 2017, even without the new taxes yet, the average inflation rate nationwide of 3.2 percent for the year was nearly double the 1.8 percent rate in 2016 as well as the 1.4 percent in 2015, as per government statistics.

Residents of Metro Manila, the same government statistics indicate, encountered bigger price increases compared to those in the provinces. The biggest increases were noted in transport costs, alcoholic beverages and tobacco products, and restaurant and miscellaneous goods and services. Increases in food prices were relatively hefty at 4 percent, or above the overall average for all products.

Spending on borrowings

Prospects for rising interest rates loom over the financial markets in many countries, although the Philippines appears to have ample room for policy strategies to cushion the local economy. International reserves remain at comfortable levels and dollar remittances continue to flow in, which could be further bolstered by a brisker growth in foreign investments that government economic mangers are anticipating.

The recent increase in consumer spending has also pushed up bank loans for household consumption. Any significant rise in interest rates would impact of these loans. 

As of October 2017, the banking system had extended P897.2 billion worth of loans for household consumption. The total amount represented an increase of P116.4 billion, or nearly 15 percent, since the start of the year.