IS THE Philippines just unlucky? Or are there more fundamental reasons why the country has long been considered the laggard among South-east Asia’s economies?

Last week, as massive flooding hit the Philippines, it seemed the hapless country could never win.

The economy chalked up an impressive 6.4 per cent gross domestic product (GDP) growth in the first quarter of this year, making it the fastest growing in the region apart from China. After two years in office, President Benigno Aquino was also winning accolades from business leaders for his anti-corruption stance.

Fiscal problems were of little concern. Indeed, Manila’s low budget deficit (around 3.6 per cent of GDP) made the country look good in comparison to its neighbours. Not surprisingly, the stock market rose almost 20 per cent in the first seven months of this year.

Meanwhile, the peso was strengthening, becoming Asia’s best performer among the 11 most-traded currencies tracked by Bloomberg. Little wonder that rating agency Standard & Poor’s raised the country’s credit rating to just one notch below investment grade last month.

“Management of the economy and fiscal consolidation have paid off with a lot of inflows,” Ms Trinh Nguyen, a Hong Kong- based economist at HSBC Holdings told the media. “The Philippines has become a favourite among investors.”

But just as things were looking up – Mr Aquino was quoted last month as saying he believed second-quarter growth would be even higher – the country was struck by torrential rains and widespread flooding. The death toll was not as high as that wreaked by tropical storm Ondoy in 2009, but it was every bit as destructive. Some reports said that as much as 80 per cent of Manila was underwater.

This was a serious calamity when one considers that the National Capital Region accounts for about 35 per cent of the country’s economic output.

Many of the towns that ring Laguna Bay – near Manila – are expected to remain underwater for several weeks. Other affected areas include Bulacan, Pampanga, Laguna and Kamanaya.

Not surprisingly, the peso declined, bond yields rose, consumer prices jumped and stock prices plunged.
Policymakers will no doubt spend the next few months blaming the unfavourable weather for slower economic growth in the rest of the year.

But is this really credible? The floods will no doubt have a significant impact on the nation’s consumer-driven economy. Bridges and roads need to be rebuilt to restore vital transportation links, and it may be years before some victims recover economically.

The fact is, however, that there were good reasons for expecting a slowdown long before the rains hit. Exports, which were growing strongly earlier in the year, were already slowing. Export growth in June, for example, was a mere 4.2 per cent, down sharply from the impressive 19.7 per cent growth chalked up in May.

The main reason appears to be a decline in exports to Japan, as that country no longer requires additional imports to help it recover from last year’s earthquake and tsunami. Japan is the Philippines biggest export market.

The rise in foreign direct investment (FDI) in recent months has also been misleading. Bangko Sentral ng Pilipinas data shows FDI inflows for the first five months of the year rising by 10.8 per cent to US$844 million (S$1.05 billion).

But this hardly suggests a sudden boom in foreign investor interest. FDI inflows fell 14.8 per cent during the same period last year. In other words, the country still has some way to go before FDI figures match the levels of previous years.

Agricultural output during the first six months was also disappointing. It grew a mere 0.93 per cent, well below the government’s annual growth target of 4 per cent.

Put bluntly, even before the flooding, most of the economic growth for the rest of the year could only be realistically expected from government spending and domestic demand. The destruction from the heavy rainfall merely exacerbated the situation.

Being unlucky is hardly an excuse. It is true that the Philippines is located in a part of the world where natural disasters have a tendency to strike with some frequency. But destroying catchment areas, allowing rivers to become silted, and building on flood-prone land hardly suggest prudence.

The Philippines also continues to lag when it comes to FDI inflows – one of the main drivers of future economic growth. Indonesia attracted US$5.7 billion in FDI in the first quarter of this year alone, far more than the Philippines has ever managed, even on an annual basis.

The reasons for this discrepancy need to be carefully examined, and the findings acted upon. Removing such fundamental impediments to growth is the best way forward.

To a large extent, nations make their own luck.

(C) Singapore Press Holdings Limited