How Estrada saved the day

PUBLISHED : Thursday, 30 November, 2000, 12:00am
UPDATED : Thursday, 30 November, 2000, 12:00am

This week's award for getting it the wrong way round goes to Philippine economic planning secretary Felipe Medalla who says that he would bet his salary on 4 per cent economic growth for his country this year were it not for certain political events.

Mr Medalla made his non-bet after announcing that Philippine economic growth was 4.8 per cent in the third quarter, much better than earlier projections.

But then we have that problem of President Joseph Estrada facing impeachment on corruption charges. Surely this will set things back again in the fourth quarter. How wise of Mr Medalla not to make his bet after all.

When you break down those third quarter figures for gross domestic product (GDP) you find that one component really gave you all the growth. As the first chart shows, there was a drastic improvement in the deficit in goods and services trade.

If you remove just this component you find that the rest of the economy did not grow at all. Instead you get a negative growth rate of 5 per cent in the third quarter. The domestic Philippine economy is still a very sluggish one.

You may then find yourself asking what led to this enormous improvement in the trade balance and one influence stands out immediately. Mr Estrada's increasingly poor standing with his countrymen coincided with another steep drop in the foreign exchange value of the peso. The two were probably related.

And the natural result ensued. Philippine exporters became more competitive this year and foreign trade receipts went up too when expressed in peso, which they are for the purpose of calculating economic growth. At the same time people began to shun more expensive imports and the trade deficit declined.

Another external influence related to the value of the peso also contributed. Net factor income from abroad is meant to represent what a country earns from its investments abroad less what foreigners take home from their investments in that country.

In the Philippines almost all of it actually represents remittances from overseas contract workers and, as the second chart shows, over the past 15 years this net figure has changed from an outflow to a massive inflow. Add it to GDP and you get a gross national product (GNP) growth rate of 5.7 per cent in the third quarter.

The decline of the peso was a critical factor here too. Remember that these workers are not paid in peso. They get foreign currency and they tend to remit a set amount of that each month. Magic happens when it crosses the Philippine borders. In peso terms it is all of a sudden much more money than it was before.

So let us put Mr Estrada's influence on all this in perspective. If he were not in trouble the peso may not have declined and these good things for economic growth would not have happened.

You will get your 4 per cent because of your president, Mr Medalla, not despite him. You ought to thank him.

Graphic: mon30gbz