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Global Financial Crisis and Its Impacts to Philippine ExportsBenjamin E. Diokno, Ph.D.
Unchartered territory
Past excesses – what FED chairman Alan Greenspan called ‘irrational exuberance – have thrown the world into a colossal financial turmoil and have pushed it into a full blown global recession
The loss in wealth is enormous: so far, financial institutions have recorded losses of some $500 billion; loss in market value of company shares has amounted to $23 trillion; 21 banks have collapsed in the U.S. alone.
Job loss at Wall Street and London City may reach 200,000 and 40,000 respectively by year-end. Millions will join the global army of unemployed.
Financial crisis globalized
The financial crisis that started with the sub-prime mortgage crisis has morphed into a full blown, global economic crisis. In a globalized world, ‘decoupling’ is dead.
Lehman Brother’s high-profile bankruptcy propelled global stock markets into a free fall on ‘Black Monday’ September 15th 2008. All 5 giant investment banks in the U.S. went bankrupt, were sold, merged or dismantled.
In an unprecedented move, the U.S. government assumed effective control of mortgage providers Fannie Mae and Freddie Mac, and of global insurers American International Group (AIG).
Financial and economic contagion
UK mortgage provider Northern Rock faced bank runs
German Hypo Real Estate and Belgian Fortis were on the verge of financial collapse
Failing banking sector pushed Iceland to the brink of state bankruptcy
China, a major holder of US treasury bills lost heavily due to the appreciation of the yuan against the U.S. dollar and a significant decline in exports to the U.S. and other developed countries
Financial and economic contagion
Japan is suffering from the steep appreciation of the yen and an uncertain future for its export sector
With the looming prospect of a weaker world economy, the price of oil has collapsed – badly hitting Venezuela and other OPEC member countries.
The UAE are reeling from debt exceeding their GDP
Pakistan, Hungary, Argentina, Iceland and Ukraine sought international help from IMF and other sources to avoid financial and economic failure.
Governments’ response is massive
US: in addition to $700 billion rescue package, the U.S. government is preparing another $300-$500 fiscal stimulus package. The Fed’s balance sheet has increased from $900 billion in August to about $3 trillion in November 2008 due to a wide range of new support measures for the banking sector and the wider public. Special programs are being considered for the US and European car industries.
The EU is coordinating a Euros 200 billion stabilization and recovery program for its members for 2009-2010, equivalent to 1.5% of EU’s annual GDP
Governments’ response is massive
UK has put a 500 billion UK pounds rescue package for the banking sector; temporary reduction of the VAT from 17.5% to 15%. Government borrowing will amount to half a trillion UK pounds over the next 5 years.
Germany has launched the new Stabilization Fund for Financial Markets. It will help distressed German financial institutions through a package of state guarantees and government buy-ins. The federal and regional governments plan to spend Euros 23 billion for a stimulus program ranging from support to small businesses to education and technological development.
Governments’ response is massive
China’s huge $1500 billion stimulus package includes public works, social welfare and tax reform. The main spending areas are public housing for the poor; infrastructure projects such as railways, roads, airports and power; earthquake rehabilitation; higher spending health and education; and increased rural incomes.
Impacts of crisis on the Philippines
Slower exports as a result of weaker world economy and consequently slower international trade
Reduction in remittances and pressure on local labor markets due to drop of overseas employment, and increasing return of migrant workers. [This is in addition to the natural increase of about 1 to 1.5 new workers to the labor force.]
Fall in foreign direct investments (FDIs) because of credit crunch and risk aversion.
Export PerformanceCountry Jan-Sep 08 $mn Percent share Annual growth
Total 38,868 100.0 4.04
Top 10 countries Total 32,894 84.63 2.58
1. USA 6,327 16.28 0.46
2. Japan 6,029 15.51 11.22
3. China 4,469 11.50 6.06
4. Hong Kong 3,883 9.99 (10.24)
5. Netherlands 2,931 7.54 (5.49)
6. Singapore 2,199 5.66 (2.18)
7. Korea, Republic of 2,088 5.37 55.79
8. Taiwan 1,467 3.77 (9.63)
9. Germany 1,901 4.89 18.44
10. Malaysia 1,599 4.12 (15.33)
11. Others 5,975 15.37 12.86
The worst is yet to come
The worst is yet to come
For the U.S. economy, the eye of the economic storm, its GDP is expected to slow from a low of 1.4% in 2008 to -0.2 % in 2009. The National Bureau of Economic Research has declared that the U.S. economy has been in recession since December 2007.
Japan’s economy is expected to slow to 0.3% in 2008, and is expected to contract to -0.1% in 2009. A weak recovery is expected in 2010.
The worst is yet to come China’s growth is expected to take a hit in 2009. Real GDP
growth is expected to moderate to 8% in 2009, from 9.6% in 2008. The slowdown is due to the poor outlook for net exports and property investment.
Hong Kong’s GDP is expected to slow sharply – from 3.8% in 2008 to 0.5% in 2009.
Netherlands, the fifth highest destination of Philippine exports, is expected to slow drastically – from a GDP growth of 3.5 in 2007, it is expected to slow to 2% in 2008 and contract by 0.2% in 2009.
The worst is yet to come
Singapore’s economy contracted by 6.3% during the third quarter of 2008. The expectation is that its economy would slow to 2.0% in 2008 and contract mildly to -0.1% in 2009.
South Korea, another export-oriented economy, is expected to slow sharply: from a GDP growth of 5.0% in 2007, the economy is expected to grow by 4.5% in 2008 and decelerate to 1.6% in 2009.
Taiwan’s GDP growth is expected to slow from 4.0% in 2008 to 1.5% in 2009.
The worst is yet to come
Germany’s economy is expected to contract by 0.2% in 2009, from a weak 1.4% growth in 2008. Recovery is expected in 2010 though the pick up is expected to be mild at 1.6%.
Malaysia is not expected to be in recession, but the economic slowdown is projected to be sharp – from 5.6% GDP growth in 2008 to 3.2% in 2009. GDP growth is expected to be modest at 3.6% in 2010.
Some conclusions
The economies of the top 10 export destinations of Philippine exports are expected to get worse in 2009, and a weak recovery is projected in 2010 for these economies.
The share of Philippine exports to the U.S. – the center of the world’s economic storm – is grossly understated. A big chunk of Philippine exports to other countries – such as Japan, China, HK, Taiwan, South Korea and Netherlands – eventually end up as exports to the US.
Final Words
The Philippine exports sector is facing formidable challenges in the next two years. Many export firms have closed and their workers laid off as a result of the the slower and fast deteriorating world economy.
With no signs that the U.S. economy was nearing a bottom, the current recession could set a new record on length. Depending on the depth and length of the economic recession, more exporters and workers in the export sector are at risk.
