The Philippine economy no longer has to increase its inflation rate to catch up with its booming economic growth so far this year, an official of the Bank of the Philippine Islands (BPI) said at the 4th annual Corporate Treasury and CFO Summit Thursday.
In the output gap theory, a country working beyond its potential in terms of gross domestic product (GDP) will have to increase inflation to catch up with the economic growth.
Investopedia defines output gap theory as a measurable comparison between actual GDP and potential GDP. “When the economy is running an output gap, either positive or negative, it is thought to be running at an inefficient rate as the economy is either overworking or underworking its resources,” it said.
Thus, when economy works beyond its potential, prices must be jacked up to catch up with labor and production costs. At least in theory.
In the Philippines, it’s a different scenario. For Teodoro Limcaoco, executive vice president of the Bank of the Philippine Islands, this basic economic theory no longer applies in the Philippines, so far as the country’s economic performance has shown.
“The [Philippine] scenario is that when you look back at what our trend in inflation, our economic growth today … is above trend and yet we are below inflation trend.
Output gap theory does not hold now,” said Limcaoco.
Economic growth in the first quarter has grown to 6.4 percent in the first quarter compared to 4.9 percent last year. Despite the growth, inflation rate has so far ranged from a low 2.7 percent in February to 3.2 percent in June this year, compared to 2011 levels of 4 percent to 5 percent.
'Jeepney economy' no longer
The reason for the controlled inflation despite economic growth is the country’s financial surplus, driven mainly by its overseas Filipinos’ remittances and the receipts from the business process outsourcing industry, said Limcaoco.
“We don’t necessarily raise interest rates right away to contain inflations. There is enough fuel,” Limcaoco said.
Combined earnings of the BPO industry and OF remittances totaled $21 billion last year, official data released by the Bangko Sentral ng Pilipinas (BSP) early this year showed.
The central bank said the resilient incomes of these two dollar-earning sectors of the economy kept the payments position in surplus. OF remittances were at $10.6 billion while BPO earnings were $10.4 billion, the BSP said.
Due to this financial fuel, the country has emerged from an economy that relies on foreign debt 10 years ago – an economy compared to a “jeepney” by the BPI executive because it is “slow to start but easy to overheat” – to an economy that is now resilient with a “net surplus.”
“For the past nine years, we’ve been running the capital accounts surplus that has taken us out of this jeepney economy; before that we relied on current account deficits. Since 2002 or 2003, we’ve been running on surpluses and that has fundamentally changed the economy,” Limcaoco said.
“Now we are a net lender of our surplus,” he added. -GMA News (August 23, 2012 3:37PM)
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