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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. Diokno I Economic Briefing 112009 4 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. Diokno I Economic Briefing 112009 5 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 Diokno I Economic Briefing 102709 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. Diokno I Economic Briefing 102709 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 Diokno I Economic Briefing 102709 8 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 Diokno I Economic Briefing 102709 Gov't Consumption Capital Formation 11 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 Diokno I Economic Briefing 102709 12 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 Diokno I Economic Briefing 102709 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 13 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 Diokno I Economic Briefing 102709 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. 14 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 Diokno I Economic Briefing 102709 15 Unemployment-hunger link With weak social protection, hunger incidence deepens as unemployment rises Diokno I Economic Briefing 102709 18 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 Diokno I Economic Briefing 100909 2012 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 20 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 Diokno I Economic Briefing 102709 21 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 Diokno I Economic Briefing 102709 22 Weaker, low-yielding tax system Tax-to-GDP ratio risks reverting to low levels seen during the Marcos final years Diokno I Economic Briefing 102709 23 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 Diokno I Economic Briefing 102709 Actual 2007 2008 2009 2010 24 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 Diokno I Economic Briefing 102709 25 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, % 26 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 27 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. Diokno I Economic Briefing 102709 28 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? Diokno I Economic Briefing 102709 29 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? Diokno I Economic Briefing 102709 30 Thank you! Benjamin E. Diokno, Ph.D. School of Economics, U. of the Philippines [email protected] Diokno I Economic Briefing 102709