Benjamin E. Diokno, Ph.D

Benjamin E. Diokno, Ph.D.

The World Economic Crisis: Its Impact on the Philippine Economy

Subdued Medium-Term OutlookEconomist Intelligence Unit global economic forecast, September 10th 2009

The global economic picture continues to improve…on the back of fading inventory reductions and as aggressive fiscal and monetary stimulus start to have an impact.

There is, however, a high change of a fullback in growth in 2011 …as the positive effect of this stimulus wanes against a background of continued fragile corporate and household sentiment.

But global growth is unlikely to return to the trend rate of recent years…until the latter part of the forecast period.

Diokno I Economic Briefing 102709

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Crisis will change the economic landscape

A new international financial infrastructure will emerge

The design and development of cities will change driven by the desire to conserve energy ( would lead to higher density)

Smarter, more fuel-efficient homes will be in demand

Demand for smaller, smarter and greener cars will rise [this suggests a leaner car manufacturing industry]

There will be shift away from fossil fuel and more focus on alternative sources of energy (wind, solar, geothermal)

The role of government will be revisited; more government intervention in the short and medium term


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Impact of the crisis on the Philippine economy

The world economic crisis has affected the Philippine economy in three ways: exports have declined OFW remittances have slowed foreign direct investments (FDIs) have decelerated.

But for the Philippines, the real problem is rising unemployment – not the closure of Philippine banks. It’s banking sector is sound, for two reasons: first, sound financial policy were adopted after the Asian financial crisis; and second, Philippine banks have limited exposure to ‘toxic assets’


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Impact of the crisis on the Philippine economy

Consumers are not buying and investors are not investing because of excess capacity and uncertainty. As a result, the government has to stimulate the economy by spending more, taxing less, or both. [In general, economists prefer higher government spending].

But higher government spending in the Philippines will be constrained by weak public finances and poor governance (specifically, corrupt practices, poor implementation capability, lack of transparency)


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Overview of the Philippine economy

The structure of the economy has not changed significantly; the services sector dominates

The slowdown which started in 2008 is broad-based. In H1 2009, the industrial sector contracted by 2.1%.


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Economic growth has slowed sharply


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Agriculture, fishery and forestry

Ave0307 H109

Agr, fishery, forestry 4.01 1.2

(Share to GDP) 19.14

Agriculture, fishery 3.95 1.25


Forestry 17.95 5.20

(Share to GDP) 0.10

Agriculture has slowed sharply to 1.2 % in the first half of 2009. But that’s barely one-fourth of its average growth rate of 4.01% from 2003 to 2007

The agricultural sector accounts for 19.4% of GDP


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Industrial sector

Ave0307 H109

Industry 4.88 -1.20


Mining, quarrying 9.54 18.75

(Share to GDP) 1.62

Manufacturing 4.66 -7.25


Construction 5.06 16.80

(Share to GDP) 4.70

Electricity, gas, water 4.70 1.95

(Share to GDP) 3.16

The industrial sector accounts for about one-third of the economy. It contracted by 1.2% in HI of 2009, a sharp drop from a robust growth of 4.9% from 2003 to 2007

Manufacturing is the biggest loser, contracting by 7.25% from an average growth of 4.7% from 2003 to 2007

On the bright side, construction grew 16.8% in H1 of 2009 owing to faster public construction; private construction contracted in H1 of 2009, however.


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Services sectorAve0307 H109

Services Sector 7.21 2.25


Trans, comm, storage 8.35 2.90

(Share to GDP) 8.55

Trade (wholesale,retail)

6.80 1.40


Finance 10.60 1.00

(Share to GDP) 5.32

Ownership of 5.29 2.60

dwellings, real estate 4.66

Private services 8.39 2.85

(Share to GDP) 8.22

Gov’t services 2.83 3.85

(Share of GDP) 8.22

The services sector accounts for about half of the economy. It slowed significantly to 2.25% growth in H1 of 2009 – less than one-third of its average growth from 2003 to 2007.

The sharp fall was broad-based. --finance, trade, real estate, transportation, communications and storage and private services. The only exception is government services.

Slowdown in wholesale and retail trade is sign of poor consumer confidence.


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Aggregate demand slowed in 2008 and 2009

The economy is consumer-driven; capital formation is low and falling

Personal consumption plummets, capital formation dives, public construction contracts by 4.4%. The slowdown in 2008 and H1 2009 was across-the-board


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Shrinking MarketConsumers remain unsure of the future

Percent of households who intend to buy in the next 12 months 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3

ConsumerDurables

20.5 21.7 26.4 20.3 10.6 8.3 9.5 9.7 9.8 12.7

Motor Vehicle

6.3 8.1 8.3 7.6 5.3 3.7 3.9 4.6 5.3 5.6

House and Lot

9.5 11.1 11.2 11.2 8.0 5.9 7.6 8.3 7.4 10.3

Philippine 12.1 13.6 15.3 13.0 7.9 6.0 7.0 7.5 7.5 9.5

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Business sentiment dropped sharply, but recovering

BSP Business Expectations Survey, Third Quarter 2009

2007 2008 2009

07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3

Small(<100) 41.7 43.2 33.6 43.2 29.2 10.5 -19.2 -5.9 -19.0 -4.8 16.8Medium(100<500) 41.5 37.8 42.2 45.8 22.0 16.4 -5.6 6.8 -19.9 3.6 19.5Large (500 &up) 42.3 54.4 39.5 53.0 30.9 15.4 -5.1 -20.5 -29.2 2.0 20.4


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2009 GDP ForecastsEmerging consensus is that the Philippine economy will barely grow by 0.4%

Institution Growth Rate (%)

Revised Growth rate(%)

GOP [June 2009 rev] 6.1-7.1 0.8-1.8

ADB [Sep 22,2009 rev] 2.5 1.6

World Bank [June 2009] 3.0 -0.5

IMF [Jun 09; Oct 09] 2.25 [-1.0] 1.0

Moody’s [April 13th rev] 3.3 2.0

Fitch [June 2009 rev] 2.5 0.1

S&P [June 2009 rev] 2.2 1.0-1.5

Economist Intel Unit 1.8 -1.9

UBS AG [Jun 09; Oct 09] 1.8 [0.5] 1.3

Standard Chartered 0.7 0.7

Consensus 0.305Diokno I Economic Briefing 102709

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Transmission Mechanisms or How the World Economic Crisis Has Affected the Philippines

Slower exports, factory closures and layoffs

Decelerating, possibly contracting, overseas remittances. Remittances account for 10-12% of GNP. A decline in remittances means lower consumer demand.

Lower foreign direct investment (FDIs) which means lower long-term growth and thus, lower employment opportunities and higher unemployment and underemployment.

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Merchandise Exports Falling Exports earnings started to

contract in 2008 -- negative 2.9% compared to the original growth target of 11%

Exports earnings from Jan to Aug 2009 fell by 30.3% : -40.6 % in Jan 2009, -39.0% in Feb, -30.6% in March, -35.2% in April, -27.0% in May, -24.7% in June,-25.4% in July, and 21.0% in August.

Is the contraction of export earnings temporary or permanent?


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Export Performance, by Country

Decoupling theory has been disproved; recession is synchonizedCountry Jan-Sep09 $mn % share Annual growth

Total 24,004 100.0 -30.33

Top 10 countries total 20,002 83.3 -30.75

1. U.S.A. 4,188 17.4 -24.12

2. Japan 3,860 16.1 -28.44

3. Netherlands 2,205 9.2 -14.83

4. Hong Kong 2,012 8.4 -41.64

5. Singapore 1,458 6.1 -24.85

6. China, People’s Republic 2,084 8.7 -47.63

7. Germany 1,409 5.9 -18.31

8. Korea, Republic of 1,172 4.9 -36.16

9. Thailand 689 2.9 -33.16

10. Malaysia 925 3.9 -34.98

11. Others 4,001 16.7 -28.16


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The Philippines’ export markets are contracting


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Remittances: positive but falling

OFW remittances have been growing at double-digit rate in recent years, but has slowed sharply in 2009

IOFW inflows for the first 8 months of 2009 rose 3.7 percent from the same period of 2008.


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Foreign direct investments down sharply

FDIs were low by international standard; hit rock-bottom in 2001

Among ASEAN-5 economies, the Philippines received the lowest FDIs. Lower FDI means lower long-term growth and thus, lower employment.


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State of Unemployment

It’s unemployment, stupid: the focus of government intervention should be on job creation and job preservation.

Even before the world economic crisis, the Philippines’ jobs market was already in a critical state: in 2007, there were on average, 2.7 million unemployed and 6.8 million underemployed. But in addition, about 1.3 million young Filipinos join the labor force every year.


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Year/Survey Unemployed in thousand

Underemply in thousand

Unemploymt rate (%)

Underemploy rate (%)

Jan 2009 2,855 6,238 7.7 18.2

April 2009 2,830 6,622 7.5 18.9

July 2009 2,922 7,034 7.6 19.8

2008 (Aver) 2,716 6,574 7.4 19.3

January 2,675 6,368 7.4 18.9

April 2,914 6,625 8.0 19.8

July 2,750 7,275 7.4 21.0

October 2,525 6,028 6.8 17.5

2007(Aver) 2,653 6,757 7.3 20.1

January 2,850 7,214 7.8 21.5

April 2,692 6,378 7.4 21.5

July 2,824 7,327 7.8 22.0Diokno I Economic Briefing 102709

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It’s unemployment, stupid

Unemployment-hunger linkWith weak social protection, hunger incidence deepens as unemployment rises


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Macroeconomic OutlookAuthor’s forecast, October 2009

Particulars 2007 2008 2009 2010 2011 2012

Real GDP growth,% 7.1 3.8 1.0 2.6 3.2 3.4

Inflation Rate, CPI 2.8 9.3 3.2 4.0 4.0 4.5

FOREX(P/US$) 46.15 44.47 47.00 46-48 46-48 46-48

Budget deficit/GDP -0.2 -0.9 -3.8 -3.2 -2.5 -2.0

Population, million 88.7 90.5 92.2 94.0 95.9 97.8

In the medium term, the Philippine economy will grow below its previous peak, and in line with a slow, new ‘normal’ growth for the world economy

The peso could appreciate should the US dollar continues to weaken and should the Philippine government continues to borrow from abroad to finance its budget deficits.

Balancing the budget in the near term is ill-advised. A gradualist cut in national government budget deficit is recommended to avoid a W-shaped recovery.


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What the Government Can Do to Avert a Recession

Pump-prime the economy by increasing spending in essential, shovel-ready infrastructure and social services

Restore consumer and investor confidence


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But the government’s higher spending ability will be constrained by weak public finances

Tax-to-GDP ratio is falling

Budget deficit is ballooning

National government debt is soaring


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Weaker, low-yielding tax systemTax-to-GDP ratio risks reverting to low levels seen during the Marcos final years


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Fiscal House in DisarrayGMA run large deficits from 2001-04; huge deficits have reemerged in recent years

Fis


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High and Rising Public DebtAs the world economy recovers, interest rates would rise, leading to higher debt service


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What will the next President inherit?A huge public debt and narrow fiscal space. Fiscal flexibility, defined as recurrent revenues less personal services, interest payments, internal revenue allotment (IRA) and net lending would disappear in 2010

But what if the next administration needs a second fiscal stimulus program?


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Impact of the Great Flood and Pepeng

Short- and medium-term Massive loss in agricultural output (in Central and

Northern Luzon) Loss of income for a great number of Metro Manila

households Lower output for utilities (power, water, and

telecommunications) and public transportation Costs of repair and reconstruction of damaged public

infrastructure Costs of damages to homes and cars and costs of

replacement of consumer durables (refrigerators, TVs, air-conditioners, etc.)


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Impact of the Great Flood and Pepeng

Long-term Massive destruction of personal property and loss in

value of assets in flooded areas (so-called wealth effects): many people are poorer now and as a result and would tend to consume less

Costs of relocation: the government has to find a permanent home for those previously living along the riverbanks of Pasig and other risky areas

Cost of rebuilding and construction of public infrastructure designed to minimize flooding in Metropolitan Manila


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Final Words Be ready for the economic recovery. Like dawn, it will

come. In fact, in the U.S. it has arrived. The recession which started in December 2007 is unofficially over.

But what’s the shape of the recovery— U, W or square root with long flat line? The consensus is that the economic crisis would be long and deep and might take many years – at least 5 years-- before the world economy would grow back to its pre-crisis levels.

Before the Great Flood and Pepeng, the road to recovery has been seen as long and bumpy –with rising unemployment as the ultimate challenge. The recent tragedy has just made the recovery more challenging.


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Boasters and Buffoons

“Great men, great nations, have not been boasters and buffoons, but perceivers of the terror of life, and have manned themselves to face it” –

Ralph Waldo Emerson, Conduct of Life (1860)


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Thank you!

Benjamin E. Diokno, Ph.D.

School of Economics, U. of the Philippines

[email protected]


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Benjamin E. Diokno, Ph.D