Our Economic Growth is Not a Bubble, and How Bubble-Panic Makes Things Worse

This is a reaction to Jesse Colombo’s Forbes article “Here’s Why the Philippines’ Economic Miracle Is Really A Bubble In Disguise” published here.

First things first, to make things clear, our recent economic growth is not a bubble. However, let me nuance this judgment – it is only good for a year. If the economy goes on a different trajectory (say, inflation spikes to double digits or real estate loans double in a year), or goes on with worrying bits of the current trajectory (say, liquidity continues growing at 30% annually), then the judgment will not hold.

As a working definition, an asset or economic bubble is a situation where the price of an asset (like real estate or stock) becomes overly inflated. Over-inflation usually happens because of high amounts of money in the economy, say, when a lot of foreign investments come in, or if the central bank prints more money, or when OFW remittances are received. When too much money is in the system, economists call this being “excessively liquid”. When we are excessively liquid, it leads to higher than normal consumption and investment, which, in turn, leads to high inflation or high investment rates. High inflation and investment rates are not necessarily bad things, but, as with all things in life, too much of anything can lead to instability.


Loss of market confidence led to the 1997 Asian financial crisis. Photo taken here.

Bubbles burst in different ways, such as when people and companies start defaulting on their debt, which is what happened in the US in 2008. It could also be due to a sudden loss of market confidence, like what happened in Thailand, and which consequently started the 1997 Asian financial crisis. When such bubbles burst , the immediate effect is a drop in the price of the asset. This may be followed by huge amounts of loan defaults. Banks become bankrupt and deposits are no longer honoured. Households lose money, and economic consumption and investment drops. Sometimes, the effects of a bubble burst could be contained within the industry directly affected; however, the most talked-about examples of bursting bubbles are usually those with effects that spill over and affect the rest of the economy.

Now, what are the reasons why I think the economy is not going to be a bursting bubble in the next year?

The usual elements of a bubble are the following:

  1. High Inflation;
  2. Low Interest Rates; and,
  3. High Investment Rate (usually in real estate and/or stocks).

The Philippines does not suffer from high inflation rates. However, it does have low interest rates and high investment growth rates. To most economists, this might be alarming, but you need to put those numbers into perspective. The Philippine economy has had booms and busts since the 1960s. Economic growth has been quite unstable until before President Arroyo came to power. The current administration continued with good monetary and fiscal management of the economy. This explains why the country now has a high investment rate. President Aquino’s trust ratings may have dipped, but his popularity remains the envy of most leaders in other countries. The current economic team continues to inspire confidence in the macro results – low inflation, balance of payments surplus (an account of a country’s payments and receipts for the year), and high GDP growth. These are good things as they support a sustainable growth scenario, as opposed to a bubble where growth is excessive and kept unchecked. In short, the Philippines is merely catching up for lost time and economic opportunity.

Padre Zamora Bridge

The Philippines is just catching up to lost time and economic opportunity. Photo taken here.

To explain the context for low interest rates, let us look no further than the on-going low growth of the global economy on the lingering aftermath of the 2008 financial crisis in the US following the bursting of the housing bubble. The Philippine government wanted to ensure growth is supported domestically through low interest rates (low interest rates mean cheaper cost of finance for consumption and investment) since foreign trade could not be a source for growth. When central banks lower policy rates, banks are able to lend at lower rates. Imagine a situation where you can borrow at 5% per annum versus 10% per annum. This makes buying a house more affordable and makes certain investments more viable since the initial investment can be borrowed from a bank today and the amount of interest paid on the loan is lower.

In my personal opinion however, we need to monitor these developments closely. In a year’s time, if the amount of money in the economy  continues to grow at around 30% per annum, if inflation is at 7% or more, and if real estate prices continue to increase (say, by 20% or more) because people continue to buy real estate for investment purposes, I will be first to raise a red flag and say that a bubble exists in the Philippine economy. Before then, I would say that there is no real reason for concern.

Popping bubble

Catching economic bubbles is tricky and may lead to bubble-panic. Photo taken here.

A final note: bubbles are tricky things to point out. People must exercise caution when they raise flags as creating a sense of panic makes the resolution of bubbles more disorderly. The IMF would calmly raise caution yearly, reminding a country’s policymakers when loan growth is and continues to remain excessive. Both the IMF and ADB has done this service for the Philippines but they  tend to not scream bubble unless they are sure things are headed for a cliff. The ADB, in fact, have noticed high liquidity growth fueling investments in the housing market. In the same breath however, they clarified that this development is not worrisome but just needs to be checked. Creating panic in the market makes things worse. The Asian financial crisis shows what panic can do – the quick and lump-sum departure of foreign capital which cost Thailand even those investors whose investments remained viable in the fear of the extent of currency depreciation. Fear caused further withdrawals of dollars which made the depreciation go much deeper than it would have.

Fear mongering and the creation of bubble-panic may cause more damage than any alleged bubble, and in the event that there is an actual bubble, simulates or aggravates the effects of one.

This is a guest post from Mark Canlas. Mark has almost ten years of experience as an economist and has worked with the National Economic Development Authority and the Senate of the Philippines. He is currently the economic attaché of the British Embassy of the Philippines.

He also owns a chain of  UPCAT and college review centers, and is a popular lecturer.

2 thoughts on “Our Economic Growth is Not a Bubble, and How Bubble-Panic Makes Things Worse

  1. ichi

    Any news on the bad loan rates in the Philippines? I dont know of any report that shows the bad loan situation in the Philippines. Interest rates are low and learning about the bad load situation can also give us insight on the current financial standing of banks.

  2. mark canlas

    hi. as of last statistical release, NPLs are significantly down from previous period. NPL ratio in PHL is around 2%. best to see if the NPLs are from new loans than old ones if using the stat to see if a bubble is forming. — mark canlas

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