Download Global Financial Crisis and its Impacts to Philippine Exports

The World Economic Crisis: Its Impact on
the Philippine Economy
Benjamin E. Diokno, Ph.D.

2
Subdued Medium-Term Outlook
Economist 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
3
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
Diokno I Economic Briefing 102709
4
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’
Diokno I Economic Briefing 102709
5
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)
Diokno I Economic Briefing 102709
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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%.
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
7
Economic growth has slowed sharply
GDP peaked in 2000, 2004 and 2007
--the last two were election years
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1999
2000
2001
2002
2003
2004
GDP g.r.
Diokno I Economic Briefing 102709
2005
2006
2007
2008
2009
8
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
H109
1.2
1.25
5.20
 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
Diokno I Economic Briefing 102709
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Industrial sector
Ave0307
H109
Industry
4.88
-1.20
(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

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.
18.75
-7.25
16.80
1.95
10
Ave0307
H109
Services Sector
7.21
2.25
(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
GDP)Briefing 102709
Diokno Iof
Economic
8.22
Services sector

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.
2.90
1.40
1.00
2.60
2.85
3.85
11
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 H1 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
12
Shrinking Market
Consumers remain unsure of the future
Percent of households who intend to buy in the next 12 months
07Q
2
07Q
3
07Q
4
08Q
1
08Q
2
08Q
3
08Q
4
09Q
1
09Q
2
09Q
3
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
Consumer
Durables
Diokno I Economic Briefing 102709
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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)
Medium(100<5
00)
Large (500
&up)
41.7
43.2
33.6
43.2
29.2
10.5 -19.2
41.5
37.8
42.2
45.8
22.0
16.4
-5.6
42.3
54.4
39.5
53.0
30.9
15.4
60.0
-5.9 -19.0
-4.8
16.8
6.8 -19.9
3.6
19.5
-5.1 -20.5 -29.2
2.0
20.4
Small(<100)
50.0
Medium(100<500)
40.0
Large (500 &up)
30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0
-40.0
Diokno I Economic Briefing 102709
07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3
2007
2008
2009
14
2009 GDP Forecasts
Emerging consensus is that the Philippine economy will barely grow by 0.4%
Institution
Growth Rate
(%)
Revised Growth
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
GOP [June 2009 rev]
Consensus
Diokno I Economic Briefing 102709
rate(%)
0.305
15
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.
Diokno I Economic Briefing 102709
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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?
Exports, growth rate,%
0
Jan
Feb
Mar
Apr
May
-5
June
July
Aug
-10
-15
-20
-25
-30
-35
-40
-45
Exports
Diokno I Economic Briefing 102709
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Export Performance, by Country
Decoupling theory has been disproved; recession is synchonized
Country
Jan-Sep09 $mn
% share
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
4,001
16.7
-28.16
11. Others
Diokno I Economic Briefing 102709
Annual growth
18
The Philippines’ export markets are contracting
Singapore
Malaysia
2009
Taiwan
2008
South Korea
Germany
Netherlands
Hong Kong
China
Japan
USA
-15
Diokno I Economic Briefing 102709
-10
-5
0
5
10
19
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.
From a peak of 25 % growth
rate, down to 3.7%
Slowing OFW remittances
30
30.0
25
25.0
24.6
20
20.0
16.9
15
15.0
10
10.0
5
0
5.0
10.5
10.4
9.3
4.9
3.3
0.8 0.1
3.1 2.2 3.7 3.3
0.0
2003
2004
2005
Diokno I Economic Briefing 102709
2006
2007
2008
2009
OFW Rem,Mo.
2.8
20
Foreign direct investments down sharply
Among ASEAN-5 economies, the
Philippines received the lowest FDIs.
Lower FDI means lower long-term
growth and thus, lower employment.
FDIs were low by international
standard; hit rock-bottom in 2001
Low and falling
3,500
35,000
FDIs
2,921 2,916
3,000
2,500
2,240
1,854
2,000
1,542
1,500
Philippines
25,000
Malaysia
20,000
Indonesia
15,000
Thailand
1,520
1,247
1,000
500
30,000
688
491
195
0
Singapore
10,000
5,000
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-5,000
-10,000
Diokno I Economic Briefing 102709
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State of Unemployment
 It’s unemployment, stupid:
the focus of government
intervention should be on job
creation and job preservation.
12,000
10,000
8,000
 Even before the world
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.
22
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
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Unemployment-hunger link
With weak social protection, hunger incidence deepens as unemployment rises
Diokno I Economic Briefing 102709
24
Macroeconomic Outlook
Author’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
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
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 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.
Diokno I Economic Briefing 102709
25
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
Diokno I Economic Briefing 102709
26
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
Diokno I Economic Briefing 102709
27
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
28
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
29
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
30
6.00
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
4.00
2.00
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-2.00
-4.00
But what if the next
administration needs a second-6.00
Fiscal flexibility-to-GDP
fiscal stimulus program?
Diokno I Economic Briefing 102709
Deficit-to-GDP ratio, %
31
Impact of the Great Flood and Pepeng
 Short- and medium-term
 Massive loss in agricultural output (in Central and




Diokno I Economic Briefing 102709
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.)
32
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
Diokno I Economic Briefing 102709
33
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.
Diokno I Economic Briefing 102709
34
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)
Diokno I Economic Briefing 102709
35
Thank you!
Benjamin E. Diokno, Ph.D.
School of Economics, U. of the Philippines
[email protected]
Diokno I Economic Briefing 102709