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May 24, 2016

In an Election Year, 6.9% Economic Growth is No Big Deal

The Philippines’ gross domestic product (GDP) grew by 6.9 percent in the first quarter of 2016, a presidential election year. That’s nothing to brag about. Strong growth in a presidential election year is not surprising. In fact, the economy expanded by 8.4 percent and 8.9 percent in the first and second quarter of 2010, respectively, much stronger than the first quarter growth of 2016.

Every election year, especially in a presidential election year, the economy gets an extra boost.  The four most recent economic peaks coincided with presidential and local elections: 6.7 percent in 2004, 6.6 percent in 2007, 7.6 percent in 2010, and 7.2 percent in 2013.

The economic spurt is predictably short-lived: the economy decelerates right after the election-related boom. GDP growth slowed from 6.7 percent in 2004 to 4.8 percent in 2005; from 6.6 percent in 2007 to 4.2 percent in 2008; from 7.6 percent in 2010 to 3.7 percent in 2011; and from 7.2 percent in 2013 to 6.1 percent in 2014.

Election_year

First Graph Source: Philippine Statistical Authority
Second Graph Source: Department of Budget and Management
With the installation of a new President, new Congress, and a new set of local officials, growth in public spending in the second half of the year is expected to be lower than in the first half.

With the harsh impact of El Nino and potentially La Nina and the flattish net foreign trade (exports less imports), I expect full year 2016 GDP to grow by 6.2 percent, significantly lower than the government’s optimistic forecast of 6.8 to 7.8 percent GDP growth rates. As an additional factor, my forecast takes into account the likelihood that public construction (about one-fifth of total construction) would post zero, possibly negative, growth in the second quarter the year.

Is there a way of mitigating the expected slowdown in the second half of 2016 and first half of 2017? There is but the Duterte administration has to hit the ground running. His economic team (Finance, Budget and Economic Planning) together with his infrastructure team (Public Works, Transportation and Communications, Energy) should meet as soon as possible to craft a feasible financial and work plan for Duterte’s six-year public infrastructure program.

Whatever is left of the 2016 P3.1-trillion budget (and it could be huge) should be reprogrammed for small- and medium-scale, ready-to-implement—hopefully agriculture-productivity enhancing—public infrastructure projects in the countryside. Low-priority projects, which have not yet been obligated, may be reprogrammed for as long as they are used within the same department and that the President approves the reprogramming.

Duterte’s team has to learn from the Aquino III administration’s slow start. The drop in public infrastructure spending from 2009 to 2010 and the prolonged pick up in capital spending in 2011 is clearly attributable to the enormous time devoted by the Aquino III administration in the review and procrastination on government programs and projects. The time-consuming review and analysis was exacerbated by the inexperience of line departments in the bidding process, which was compounded, in many cases, by the poor choice of contractors. The MRT experience is one of the most glaring examples.

The Duterte administration should learn quickly from these missteps of the Aquino III administration.

President-elect Duterte and his men shouldn’t accept the view that the 2017 national budget is a transition budget; the 2016 budget is the transition budget. Next year’s budget is Duterte’s first. It should already reflect his immediate, medium-term, and long-term plans and aspirations for the country.

Mr. Duterte has enough time to embody his own priorities, his own political and economic agenda, in the 2017 budget. Under the Philippine Constitution, he is mandated to submit to Congress a Budget of Expenditures and Sources of Financing (BESF) for the ensuing year within 30 days after he delivers his State of the Nation Address (SONA).

His SONA is on the fourth Monday of July or July 25th this year. Hence, he has until August 24th, or approximately 8 weeks from his assumption to office, to prepare the 2017 BESF.

Even now, if he wants to, he can use the entire month of June to prepare for the 2017 budget.

Indeed, if Mr. Duterte wants to hit the ground running, as some of his supporters expect him to, he should start cracking the whip.

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