ADB: Economy may be overheating
MANILA -- After several quarters of high economic growth, the Philippine economy may already be showing signs of overheating, according to the Manila-based Asian Development Bank (ADB).
In its October 2013 Asian Economic Integration Monitor, the ADB said these signs of overheating pertain to rapid money-supply growth and the recent increase in the share of real-estate lending.
The ADB said money supply in the Philippines has reached a growth of almost 30 percent as of the third quarter of 2013; real-estate lending has reached close to 17 percent of total loans in the same period.
“The Philippines is performing strongly, with growth higher than expected over the past few quarters,” the ADB said. “Inflation remains moderate, but the rapid money-supply growth and an increase in the share of real-estate lending signal the possibility of overheating.”
Other multilateral institutions and local and international analysts had similarly pointed out the possibility that the economy is overheating.
But National Economic and Development Authority (Neda) Assistant Director General for Planning and Policy Rosemarie G. Edillon does not believe so. She said the increase in money supply and real-estate lending was largely due to the recent policy of the Bangko Sentral ng Pilipinas (BSP) to ban non-pooled trust accounts from the SDA facility by January 2014.
BSP Deputy Governor Diwa C. Guinigundo said the rapid domestic liquidity (M3) growth appears significant, “only because the Philippines has a lot of catching up to do.”
Guinigundo said the analysts from ADB and elsewhere should instead consider the M3-to-GDP ratio, or money supply as percentage of local output, which, he said, remains relatively modest.
“The economy is expanding and financial deepening is taking place. We need to provide appropriate levels of money supply. If there is overheating, we should never be having this long period of high output growth and low inflation. People should realize the country’s potential capacity has expanded significantly in the last few years on account of policy reforms and capital formation. Total factor productivity has gone up consistent with efficiency gains. The structure of the economy is slowly transforming,” he said.
The next deadline for the phasing out of the special deposit account (SDA) facility is expected next month. Efforts to meet this deadline are now causing an increase in money supply and in real-estate lending.
Edillon said banks were now looking for areas to place the SDA funds and it would take time for them to do this. But she said she expects things to “equilibrate” by January 2014.
“The economy is not overheating. While it’s true that there’s an increase in M3, its only temporary. Banks are looking for ways to dispose [of these funds]. When you look at the liquidity position of banks, ayos pa din,” Edillon said. “Nothing to be concerned about. There is still room for us to grow.”
Edillon said overheating simply indicates that an economy is nearing capacity. One of the indicators is inflationary tendencies, which have not happened at this time. She added that the recent Monthly Integrated Survey of Selected Industries (MISSI) showed that industries operating at full capacity, or at 90 percent to 100 percent, account for only a little more than 20 percent. The August 2013 MISSI data released by the National Statistics Office showed that 22.7 percent of establishments were operating at full capacity in August 2013. Around 55.1 percent operated at 70-percent to 89-percent capacity, while 22.2 percent of such establishments operated below 70-percent capacity.
This means, Edillon said, there was still room to romp up production. As gross domestic product (GDP) is a measure of production, there is still room for higher GDP growth.
Further, in terms of labor supply, the July Labor Force Survey showed the country had an unemployment rate of 7.3 percent, higher than the 7 percent in July 2012.
The data also showed that the underemployment rate was at 19.2 percent in July 2013. But this was lower than the 22.8 percent recorded in July 2012.