Transcript Global Financial Crisis and its Impacts to Philippine Exports

Philippine economic prospects, the 2010

elections and implications on the banking sector
Benjamin E. Diokno, Ph.D.
2
Good News, Bad News
2008 2009 2010
 The good news is that the
synchronized and
coordinated monetary
easing and fiscal stimulus
programs worked.
Confidence rebounded
strongly on both the
financial and real fronts,
as extraordinary policy
support forestalled
another Great
Depression.
Diokno I Economic Briefing 112009
2011
Advanced
economies
0.5
-3.2
2.1
2.4
United States
0.4
-2.5
2.7
2.4
Euro area
0.6
-3.9
1.0
1.6
Japan
-1.2
-5.3
1.7
2.2
Newly
industrialized
Asian
economies
1.7
-1.3
3.3
3.6
ASEAN-5
4.7
1.3
4.7
5.3
3
Good News, Bad News

Most economies are starting to recover. But recovery is
proceeding at different speeds. There is also the risk of a
fullback in growth in 2011 …as the positive effect of this
stimulus fades against a background of continued fragile
corporate and household sentiment.

One thing is sure: global growth is unlikely to return to the
trend rate of recent years until perhaps after a few years.

Achieving sustained robust growth over the medium term will
depend critically on addressing the supply disruptions
generated by the crisis and rebalancing the global pattern of
growth.

Continued policy efforts are needed to sustain the recovery
and prepare for exit.
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How will the global economy rebalance?
IMF, WEO, October 2009

On the supply side, financial firms will need to be
restructured and markets repaired to deliver adequate credit
for sustained increases in investment and productivity. And
labor will need to be redeployed across sectors.

On the demand side, rebalancing depends on switching
from public to private demand and from domestically to
externally driven growth in many economies that
experienced asset price busts.

By implication, economies that previously relied on
export-led growth will need to switch from externally to
domestically driven growth.
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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 2009, the industrial
sector contracted by 2.0%.
100%
10
90%
8
80%
70%
6
60%
50%
4
40%
30%
2
20%
10%
0%
2001
0
2001
2002
2003
204
Agriculture
2005
Industry
2006
2007
2008
2002
2003
2004
2005
2006
2007
2008
-2
Services
-4
Agriculture
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Industry
Services
2009
6
The economy has suffered a savage fall
GDP peaked in 2000, 2004 and 2007
--the last two peaks were election years
8.0
7.2
7.0
6.4
6.0
6.0
5.4
5.0
4.9
4.6
4.4
4.0
3.0
5.0
3.4
2.0
1.8
1.0
0.0
0.0
1999
2000
2001
2002
2003
2004
GDP g.r.
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2005
2006
2007
2008
2009
7
Agriculture, fishery and forestry
Ave0307
Agr, fishery, forestry
4.01
(Share to GDP)
19.14
Agriculture, fishery
3.95
(Share to GDP)
19.04
Forestry
17.95
(Share to GDP)
0.10
2009
0.1
-0.7
-1.1
 Agricultural output was
stuck at zero growth in 2009
-- compared to an average
growth rate of 4.01% during
the most recent peak (2003 2007).
 The agricultural sector
accounts for 19.4% of GDP
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Industrial sector
Ave0307
Industry
4.88
(Share to GDP)
32.84
Mining, quarrying
9.54
(Share to GDP)
1.62
Manufacturing
4.66
(Share to GDP)
23.96
Construction
5.06
(Share to GDP)
4.70
Electricity, gas, water
4.70
(Share to GDP)
3.16
Diokno I Economic Briefing 102709
2009
-2.0 
The industrial sector contracted by
2.0% in 2009, a sharp drop from its
robust growth of 4.9% from 2003 to
2007.
21.0

Manufacturing was the biggest
loser, contracting by negative 5.1%
from an average growth of 4.7%
during its recent peak. That’s a
swing of about 10%. Even the
utilities sector has contracted.

On the bright side, construction
grew by 5.8% in 2009 owing to
faster public construction; however,
private construction contracted
during the same period.
-5.1
5.8
-2.8
9
Ave0307
2009
Services Sector
7.21
3.2
(Share to GDP)
48.01
Trans, comm, storage
8.35
(Share to GDP)
8.55
Trade (wholesale,retail)
6.80
(Share to GDP)
16.87
Finance
10.60
(Share to GDP)
5.32
Ownership of
5.29
dwellings, real estate
4.66
Private services
8.39
(Share to GDP)
8.22
Gov’t services
2.83
(Share of GDP)
4.40
Diokno I Economic Briefing 102709
Services sector

The services sector slowed
significantly to 3.2% growth in
2009 – significantly less than 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 weak consumer
demand.
1.8
2.0
7.1
-1.0
3.8
5.0
10
Aggregate demand slowed in 2008 and 2009
The economy is consumer-driven;
capital formation is low and falling
90.00
78.49 78.67 78.30 78.28 78.28 77.33 77.20
80.00 77.77
Personal consumption plummets, capital
formation dives, public construction
contracts by 4.4%. The slowdown in 2008
and 2009 was across-the-board
15.00
70.00
10.00
60.00
5.00
50.00
40.00
30.00
0.00
22.12 20.38 20.13 20.28
20.00
10.00
17.64 17.18 17.49 18.10
7.53
7.03
6.86
6.54
6.33
6.37
6.53
6.70
2001
2002
2003
2004
2005
2006
2007
2008
0.00
PCE
Gov't Consumption
Capital Formation
-5.00
-10.00
-15.00
-20.00
PCE
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Gov't Consumption
Capital Formation
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Challenges for the next administration
 Low investment rate, particular low foreign direct
investment
 Unemployment: large and rising joblessness
 Poverty owing to slow, non-inclusive growth and
fast-growing population
 Severe budget constraint—the next administration
will be faced with narrowing fiscal space
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Foreign direct investments down sharply
Among ASEAN-5 economies, the
Philippines received the lowest FDIs.
Lower FDIs mean lower long-term
growth and thus, lower employment.
FDIs were low by international
standard; hit rock-bottom in 2001
3500
Lowest in ASEAN-5
29212916
3000
2240
Thailand
10,000
Singapore
5,000
-5,000
-10,000
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2008
0
2007
0
15,000
2006
195
688
Indonesia
2005
500
491
20,000
2004
1000
Malaysia
2003
1500
1500 1247
25,000
2002
1542
1900
2001
1854
Philippines
2000
2000
30,000
1999
2500
35,000
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It’s unemployment , stupid
 The focus of government
intervention should be on job
creation and job preservation.
12,000
10,000
 Even before the world
8,000
6,000
4,000
2,000
0
07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2
Unemployed
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Underemployed
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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It’s unemployment, stupid
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
22.0
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Unemployment-hunger link
With weak social protection, hunger incidence deepens as unemployment rises
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Poverty outlook is grim
Poverty incidence will get worse
before it gets better
35
Poverty probably worsened in 2009
34
34
33
33
32.9
33
32
31
30
30
29
28
2000
2003
2006
2009
Poverty Incidence
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But let’s talk of warm bodies
Why poverty has worsened in
2009?

Food and fuel prices rose sharply in
2008
Poor people growing
35
30
25


The economy slowed as the world
economy contracted –thus
unemployment worsened. Job
prospects remain gloomy in the
face of weak and fragile recovery.
Population continues to grow - the
less educated poor outgrowing the
educated rich.
20
15
28.6
25.2
24.6
2000
2003
31.4
10
5
0
2006
2009
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What should the government do?
 Continue the fiscal stimulus by increasing
spending in essential, shovel-ready
infrastructure, education, health and
agriculture
 Restore consumer and investor confidence
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But the government’s ability to increase spending
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 system
Tax-to-GDP ratio risks reverting to low levels seen during the Marcos final years
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Fiscal House in Disarray
GMA run large deficits from 2001-04; huge deficits have reemerged in recent years
Fis
0.0
2001
2002
2003
2004
2005
2006
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
Target
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Actual
2007
2008
2009
2010
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High and Rising Public Debt
As the world economy recovers, interest rates would rise, leading to higher debt service
Double Your Debt In 10 Years
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Debt of Nat'l Gov't
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6.00
What will the next
President inherit?
4.00
A huge public debt and narrow
2.00
fiscal space. Fiscal flexibility,
defined as recurrent revenues
less personal services, interest 0.00
payments, internal revenue
allotment (IRA) and net lending
-2.00
would disappear in 2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
But what if the next administration-4.00
needs a second fiscal stimulus
program?
-6.00
Fiscal flexibility-to-GDP
Diokno I Economic Briefing 102709
Deficit-to-GDP ratio, %
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Near and medium-term macroeconomic outlook
Author’s forecast, March 2010
Particulars
2007
2008
2009
2010
2011
2012
Real GDP growth,%
7.1
3.8
0.9*
2.8
3.2
3.4
Inflation Rate, CPI
2.8
9.3
3.2
4.5
4.0
4.5
46.15
44.47
47.00
46-48
46-48
46-48
Budget deficit/GDP
-0.2
-0.9
-3.8
-4.0
-2.5
-2.0
Population, million
88.7
90.5
92.2
94.0
95.9
97.8
FOREX(P/US$)

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 continue to weaken and should
the Philippine government continue to borrow from abroad to finance its budget
deficits.

Balancing the national government budget by 2013 is ill-advised. A gradualist
cut in the deficit is recommended to avoid a W-shaped recovery.
Diokno I Economic Briefing 102709
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We’re at a crossroads once more

The next President will face daunting challenges. But a ‘good’
elections, followed by a smooth transfer of powers, could
result in renewed confidence in our political system.

What qualities are we looking for in the next President?

Strong leadership and willingness to undertake bold reforms,
such as, first, fundamental tax reform (shift from income-based to
consumption based taxation), second, more focused public spending
program, and third, changing the way the government operates by
embracing transparency and accountability in the use of public funds.

Excellent communicator. The next administration’s economic
recovery program will involve a lot of pain. This program has to be
communicated well to all Filipinos -- especially the poor and
powerless.
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Litmus test for the next President

What’s the presidential candidate’s position on the following
issues?
 Higher value added tax, lower personal and corporate
income tax
 Higher spending for social services such as conditional cash
transfer and universal basic health care
 Cutting pork barrel (P75 million per congressman, P200
million per senator)
 Declaring the existence of a budget crisis and cut Internal
Revenue Allotment by one-fourth
 Program for population management
Dilemma: what’s the likelihood that the presidential
candidate will do what he promised if elected?
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What the country needs now?
 An honest, orderly and peaceful election (HOPE).
Elections should not be seen as a source of
economic growth. Rather it should be seen as a
source of pride by a free and democratic people.
Every credible and peaceful election is a building
block for a strong democracy. But perhaps the only
time we’ve had a credible presidential election under
the newly restored democracy was in 1998 when
Estrada was elected – and then he was removed
unconstitutionally.
 The important question is: Can we afford to have
another failed election?
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Thank you!
Benjamin E. Diokno, Ph.D.
School of Economics, U. of the Philippines
[email protected]
Diokno I Economic Briefing 102709