It is tough being a small economy in an AI boom

• By Daniel Moss / Bloomberg Opinion

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You have to feel sorry for the Philippines. An economy that was doing nicely has once again become Southeast Asia’s straggler, even though officials are doing many right things. Painful as it is, they should stick to their guns.

Faced with a run on the currency, the central bank has forgone the kind of aggressive intervention that Indonesia and Japan have favored. That makes sense, given the massive foreign-exchange market dwarfs the Philippines’ ability to effectively combat the slide. Nor has Philippine President Ferdinand Marcos Jr sought to scapegoat the head of the monetary authority or the finance secretary by pushing them out. He is standing by their fairly orthodox approach to the multiplying challenges.

However, it is not easy to watch. The Philippine economy is geared more toward domestic demand. Decades of underinvestment are again making themselves felt. The artificial intelligence (AI) boom is threatening to widen the gap.

An analysis from Bank of America was bullish on the overall benefits of AI spending for Southeast Asia, but cautioned that not everybody would prosper to the same degree. Malaysia, an export and semiconductor powerhouse that is the site of a big data center buildup, is well positioned. While it is a standout winner, Indonesia and the Philippines are laggards.

Manila’s more pressing issues are close to home. Growth has been set back by a graft scandal involving procurement for flood relief measures. The furor has curbed spending on public works. The peso is the worst performer in Asia this quarter, down about 2.3 percent against the US dollar and hovering at record lows. It has also posted some of the biggest declines among emerging markets, a move that is exacerbating a significant inflation problem.

The combination of plummeting growth and quick inflation is forcing policymakers to pick their priorities. While it is probably too soon to diagnose a case of stagflation, it is troubling that the word has even entered the conversation.

In the years before the COVID-19 pandemic, and immediately afterward, the Philippine economy was a star. The expansion was so hot it compared favorably with China. Today, it is a different story.

With GDP growing far slower than anticipated last quarter, it is one of the worst performers in Asia and far behind Malaysia and Singapore, whose numbers have been boosted by exports and the surge in demand for semiconductors. These neighbors spent the 1970s and 1980s enmeshing themselves in global supply chains and pouring money into infrastructure and education. They were right to do so.

Manila would have to just hope it can ride out the current difficulties and, then, take a step back and develop a long-term strategy that resembles the one undertaken by regional peers in less arduous times. At the moment, the alternatives to orthodoxy are unappealing.

Bangko Sentral ng Pilipinas Governor Eli Remolona is left to smooth some of the sharper declines in the currency. He has told lawmakers that trying to strengthen the peso to 60 per greenback (it traded at 62 on Friday) or more only risks burning through reserves. Imposing capital controls as Malaysia did in 1998 would be unwise. That was a time of acute crisis in emerging markets and, while the radical steps put a floor under the ringgit, the country did pay a price — the government got a reputation for inconsistency that took many years to wear off.

Remolona has raised interest rates, mostly to curb inflation that is still well above the central bank’s target because of the Iran war. The Philippines is especially vulnerable, importing almost all the oil it requires.

Not everything is grim. Last month, the World Bank upgraded the archipelago to upper-middle income status. It has a relatively young, mobile workforce with high proficiency in English — although that edge might be slipping — and AI is as much a threat as an opportunity to the Philippines’ outsourcing industry, which has been a crucial source of jobs and growth in recent decades.

Central bankers are not in the job to be popular. Paul Volcker, who crushed inflation in the 1980s as US Federal Reserve chair, was sent timber by home builders put out of business by high rates. Ben Bernanke, one of his successors, kept a plank in his office as a reminder that hard times were what he trained for. It is up to Marcos to sell the necessary pain and, while doing so, stand by Remolona.

There is not a lot of choice, but maybe doing the right thing should offer some consolation. At some point, it will be noticed. Hopefully, it would not be too late.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.