The Philippines: Challenges from and Responses to the Global Economic Crisis

1. The Philippines: Challenges from and Responses to the Global Economic Crisis Benjamin E. Diokno, Ph.D.

2. Impact on the Philippine Economy • Sharp slowdown in economic growth: the Philippine economy has significantly slowed to 4.6% in 2008 from a robust growth of 7.2% in 2007. • Economic growth is likely to slow further to less than 3.0% in 2009. • The weaker growth would worsen the critical unemployment problem. Diokno IGlobal Econ Crisis

3. Economic growth has slowed --and the deceleration is expected to continue Diokno IGlobal Econ Crisis

4. 2009 GDP Forecasts Diokno IGlobal Econ Crisis

5. Diagnosis • The world economic crisis has affected the Philippine economy in three ways: exports have declined, remittances of Filipino overseas workers have slowed, and foreign direct investments have declined • The real problem is rising unemployment – not the closure of Philippine banks. The financial sector is sound. Two reasons: sound financial policy and Philippine banks have limited exposure to ‘toxic assets’ Diokno IGlobal Econ Crisis

6. Diagnosis • Consumers are not buying and investors are not investing because of excess capacities and uncertainty. As a result, the government has to stimulate the economic either by spending more or taxing less, or both. • But higher government spending in the Philippines will be constrained by weak finances and poor governance. Diokno IGlobal Econ Crisis

7. Consumer Confidence FallingOverall Consumer Outlook Index, BSP Q2 2008 Diokno I Forecast 2008 and 2009

8. Shrinking MarketConsumers are more unsure of the future Diokno I Forecast 2008 and 2009

9. Transmission Mechanisms • Slower exports, factory closures and layoffs • Overseas remittances slowing. Remittances account for 10-12% of GNP. Fall 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. Diokno IGlobal Econ Crisis

10. Exports Falling • Exports earnings in 2008 contracted by 2.9% -- a sharp departure from the original growth target of 11% • The downward trajectory is alarming: 12% decline in October, 11.4% fall in November, and 40.4 decline in December. • Electronic products, which account for 58% of total exports, fell by 47.6 % in December after a 17.0 % plunge in November and a 13.6% decline in October 2008. Diokno IGlobal Econ Crisis

11. Slower exports • Exports is expected to worsen in 2009. The economies of the top 10 destinations of Philippine exports, which account for about 85% of total exports, are projected to worsen in 2009. • Under the most optimistic scenario, these 10 economies are expected to recover in 2010. But the economic recovery is expected to be weak. Diokno IGlobal Econ Crisis

12. Export Performance Diokno IGlobal Econ Crisis

13. The worst is yet to come Diokno IGlobal Econ Crisis

14. Overseas Remittances Slowing • Remittances from Filipino living and working abroad account for about 10 to 12% of GNP. Monetary authorities expect remittances to grow by 6-9% in 2009 to about $18 billion from 2008’s projected $16.6 billion. • Some forecasters disagree. JP Morgan, US investment bank, said remittances by Filipinos living and working abroad will likely exhibit little or no growth in 2009. The impact of job loss in some economies would be offset by the increase in deployment. Diokno IGlobal Econ Crisis

15. Growth of remittances: positive but slowing Diokno IGlobal Econ Crisis

16. Foreign direct investments down sharply • Net FDIs from January to November 2008 reached US1.7 billion. But this level is 40.9% lower relative to the comparative year-ago level. FDIs have fallen sharply because of the credit crunch and risk aversion. • Net inflow of equity capital during the eleven-month period reached $US1.0 billion – but this is nearly 50% lower than the year-ago level. • Slower foreign direct investment means slower economic growth in the future. Diokno IGlobal Econ Crisis

17. State of Unemployment • The focus of government intervention should be on job creation and job preservation. • Even before the global economic crisis, the employment situation was in a critical state: in 2007, there were on average, 2.7 million unemployed and 6.8 million underemployed. In addition, 1-1.5 million young Filipinos join the labor force. Diokno IGlobal Econ Crisis

18. Unemployment Crisis Diokno IGlobal Econ Crisis

19. PhP330-B Fiscal Stimulus Program: Goals • To ensure sustainable growth and attain the 4.7% GDP growth target in 2009 • To save and create as many jobs as possible • To protect the most vulnerable sectors: the poorest of the poor, returning overseas Filipino workers, and workers in export industries • To ensure low and stable prices • To further enhance competitiveness in preparation for the global economic rebound Diokno IGlobal Econ Crisis

20. Will the P330-B fiscal stimulus work? • P160 billion in incremental government allocations • P100 billion for government corporations, financial institutions and the private sector • P40 billion for corporate and individual income tax breaks • P30 billion in temporary additional benefits from GSIS, SSS and Philhealth Diokno IGlobal Econ Crisis

21. How much is real, recycled, redundant? • The PhP160 billion in incremental governmental allocations is bloated • The real amount is only P75 billion if the increase in personal services (salaries and wages) and increase in the Internal Revenue Allotment are netted out. The level proposed in 2009 based legally mandated under the Local Government Code of 1991. • It matters whether the project to be funded is labor-intensive or capital-intensive (in some cases, land-intensive like an airport) or whether the project is small or large. Diokno IGlobal Econ Crisis

22. The P100 billion public-private sector fund • Why are the unelected private individuals directly involved in the identification, selection and funding of public infrastructures? • How can the government ensure transparency and fiscal accountability in the use of funds to be provided by government banks (DBP and LBP), social security agencies (GSIS and SSS) and the National Development Company? • How soon can these projects get implemented? Details are sketchy. Likely not to take off. Diokno IGlobal Econ Crisis

23. Tax cuts as fiscal stimulus? • The reduction of the corporate income tax rate from 35% to 30% should be counted as a fiscal stimulus. That was part of the law passed in 2005. It has been announced even before the global economic crisis. Won’t have much effect in an environment where corporate profits are contracting. • Tax cut for personal income tax was also implemented in 2008 and fully integrated in the individual income stream. It’s not new and therefore should not be counted as part of the fiscal stimulus package. Diokno IGlobal Econ Crisis

24. P30 billion in temporary social security benefits • This part of the Philippine Economic Resiliency Plan is also sketchy. • Includes condonation of interest and penalties for loans of those who lost their jobs. Not much to make a difference in consumer behavior since there is no direct increase in consumer income. And even if there is, consumption behavior may not change because the increase in income is temporary. Diokno IGlobal Econ Crisis

25. Necessary conditions for FS to work • Focus on projects with high labor content that are doable within the year. • Involve local governments in project implementation. Local authorities from 81 provinces, 136 cities and some large, first-class municipalities should be involved in the reconstruction, repairs and maintenance of local roads. • All projects funded under the fiscal stimulus program should be transparent. • All programs and projects should be strictly monitored. Fiscal accountability should be observed. Diokno IGlobal Econ Crisis

26. Constraints to the implementation of the fiscal stimulus program • Limited fiscal capacity. Tax effort remains low. The 2009 budget deficit could range from PhP180- 200 billion (slightly higher than 2% of GDP). Large deficits will add to large public debt. • Poor governance. There is doubt on the ability of the bureaucracy to implement projects on a large scale. Allegations of corruption persist. Poor executive-legislative relationship delays budget approval. Diokno IGlobal Econ Crisis

27. Concluding Remarks • Consumer spending has lost momentum in 2008 and this is expected to continue to weaken in 2009 because of rising unemployment and weak consumer confidence. • Investment has deteriorated because of excess capacity, fragile markets and uncertainty. • With weak consumer spending and slowing investment, the government has to put in place a prudent and strategic fiscal stimulus package. Diokno IGlobal Econ Crisis

28. Concluding Remarks • Prudent: because the government’s fiscal space is limited. In the long-run, the government has to worry about the effects of higher deficits on the existing high level of public debt. • Strategic: the government must try to achieve multiple objectives under a more difficult external environment and serious internal shortcomings. It should address the worsening unemployment problem, deepening poverty and rising incidence of hunger. At the same time, it must strengthen political and economic institutions necessary for sustained and robust long-run growth. Diokno IGlobal Econ Crisis

29. Thank you! Benjamin E. Diokno, Ph.D. School of Economics, U. of the Philippines -bediokno@gmail.com Diokno IGlobal Econ Crisis