4969977 Inquirer Briefing By Cielito Habito

A Mid-Year Economic Assessment Dr. Cielito F. Habito Ateneo Center for Economic Research & Development Ateneo Center for Economic Research and Development

Overview • Key Economic Trends for 1st Half of 2008 • Persistent Challenges: – Storm winds – Low fuel – Excess baggage • Food and oil prices: quo vadis? • Outlook for remainder of 2008 • Economic imperatives Ateneo Center for Economic Research and Development

2008 Highlights Pluses +Private domestic investment has rebounded; offsets drop in public construction and FDI +Consecutive government surpluses Ateneo Center for Economic Research and Development

2008 Highlights: Minuses ―Prices: Inflation hits double-digits ―Jobs: Massive job losses ―Incomes/Output: Slowdown or reversal across the board ―Personal Consumption: Dramatic slowdown ―Net FDI inflows: Steep decline ―Government Spending: Now a drag ―Exports & Imports: Stunning Ateneo Center for Economic Research and Development

Prices: Steepest rise in 17 years Year 2003 2004 2005 2006 2007 J uly-08 Non-NCR F ood Year Ave. Inflation Rate (%) 3.1 5.5 7.6 6.2 2.8 12.2 13.9 18.6 8.3

Jobs (April 2008): Massive Job Losses Employment (NSO-LFS) Unemployment Rate (%) New Definition Latest Period Apr '08 8.0 -168 46 -244 30 19.8 Year Ago Prev 2007 Period Average (Jan-Apr 2008) 7.7 -10 101 -120 10 19.3 Apr '07 J an '08 7.4 1,005 572 21 413 18.9 7.4 149 156 4 -11 18.9 Jobs Generated ('000) Agriculture Industry Services Underemployment Rate (%)

Profile of the Jobless • 2.9 million are unemployed • 6.6 million are underemployed; mostly in agriculture • Of the unemployed: 50% are within ages 15-24 years; 80% are within 15-34 years 59% reached only elementary or high school Ateneo Center for Economic Research and Development

Where Did The New Jobs Come From? J obs by Sector (T housands) Agri Agri, Hunting & For Fishery Industry Mining Manufacturing Utilities Construction Services W&R T rade Hotels & Rest T ransStor-Comm Finance Real Est&Bus Act Public Adm Educ Health & SW Other Serv Priv HH Emp Intl Orgs New J obs Apr-07 583 438 112 26 5 -105 4 121 431 -17 -39 77 10 119 46 -2 11 94 134 0 New J obs J ul-07 -221 -206 -49 195 5 2 35 154 434 24 42 78 20 161 37 9 4 17 43 0 New Jobs Oct-07 -25 22 -47 172 2 44 2 125 335 -78 -20 137 5 79 56 48 39 11 58 0 New Jobs Jan-08 -197 -227 -2 23 3 -42 33 29 99 -72 -126 4 74 4 -30 45 2 38 35 0 New J obs Apr-08 41 184 -108 -261 -34 -183 -1 -9 18 -99 63 21 32 29 126 28 -2 -105 -75 0

Production Performance: Services-Led Growth Indicator GNP Growth (%) Net Factor Inc fr Abr GDP Growth (%) Agri, Fish & Forestry Industry Services 2006 FY 6.1 13.3 5.4 3.8 4.5 6.7 Q1f 7.3 11.3 7.0 4.0 6.6 8.4 Q2f 9.8 25.3 8.3 4.2 10.3 8.4 2007 Q3f 9.1 31.9 7.1 5.7 6.6 8.0 Q4f 6.0 0.6 6.4 5.7 4.9 7.8 FYf 8.0 16.5 7.2 4.9 7.1 8.1 2008 Q1 7.3 30.3 5.2 3.0 3.9 6.9 Ateneo Center for Economic Research and Development

Industry Sector Performance: Construction, Mining Slow Down; 2006 2007 2008 Utilities Pick Up Sector FY Q1f Q2f Q3f Q4f FYf Q1 INDUST SECT RY OR Mining/Quarrying Manufacturing Construction Utilities 4.5 -6.1 4.6 7.3 6.4 6.6 14.7 4.1 21.7 4.4 10.3 38.9 3.4 37.0 5.4 6.6 24.0 3.7 17.8 8.4 4.9 21.5 2.6 13.4 8.3 7.1 25.9 3.4 23.1 6.7 3.9 13.4 2.3 4.5 10.4 Ateneo Center for Economic Research and Development

Services Sector Performance: Real Estate & Finance Continue to 2006 Lead 2007 2008 Sector FY Q1f Q2f Q3f Q4f FYf Q1 SERVICE SECT OR T rans, Comm & Stor Transport & Storage Communication T rade Finance Own Dwell & Real Est Real Estate Private Services Government Servcs 6.7 6.3 3.1 9.0 6.1 11.4 5.7 17.1 6.9 4.7 8.4 10.5 7.0 13.2 7.2 16.3 5.5 19.1 8.4 1.7 8.4 9.6 5.5 13.0 7.6 14.2 6.0 21.4 9.1 2.4 8.0 5.8 5.2 6.4 9.1 11.4 6.8 21.3 8.7 3.4 7.8 7.4 6.6 8.0 8.8 10.7 5.0 11.4 7.6 2.9 8.1 8.3 6.1 10.1 8.2 13.1 5.9 18.1 8.4 2.6 6.9 6.7 10.0 4.3 6.8 12.9 5.8 15.6 5.1 3.5 Ateneo Center for Economic Research and Development

What pushed 2007 growth beyond 7%? • Production (S) side: Mining (26%) Construction (23%) Real Estate (18%) Finance (13%) Communication (10%) Government Consumption (10%) Public Construction (30.8%) Ateneo Center for Economic Research and Development • Spending (D) side:

Demand Side: Last Year’s Main Booster, Government Spending, Fizzles Out 2006 2007 2008 Indicator F Y Q1f 5.9 9.5 8.7 20.4 18.9 21.3 4.3 2.0 10.8 -1.8 Q2f 5.6 11.9 17.6 34.4 59.4 13.7 8.8 7.1 4.9 -10.5 Q3f 5.7 6.4 7.6 16.8 11.5 19.5 2.3 3.6 3.7 -5.0 Q4f 6.2 4.6 11.0 11.7 15.4 9.2 2.6 5.1 3.9 0.2 F Yf Q1 Personal Consn Exp Govt Consumption Capital F ormation Of which: Construction Public Private Durable Eqpt Br S tck & Orch Dev Exports Imports 5.5 6.1 2.7 5.5 24.7 -3.7 -1.8 -0.4 11.2 1.9 5.8 8.3 11.2 21.3 29.6 15.9 4.5 4.5 5.6 -4.5 5.1 -1.0 7.3 6.1 -9.5 15.1 8.2 -1.5 -11.1 -6.6 Ateneo Center for Economic Research and Development

ASEAN Investment Growth (2002-2006 Annual Growth Rates, %) 19.7 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 - 2.0 18.1 11.1 7.5 4.2 3.1 4.7 0.0 0.2 RP LAO SIN MAL INDO THA VIET CAM MYA Ateneo Center for Economic Research and Development

Foreign Direct Investment Sharp Drop in 2008 Annual Growth Rate (%)* 2007 2008 F oreign Direct Investments Equity Capital Reinvested Earnings Other Capital 175.9 44.3 -13.9 484.6 -43.5 -59.4 -7.7 -31.9 *Based on J an-Apr figures (Source: BS P) Ateneo Center for Economic Research and Development

Foreign Trade Slowed in 2007; Drops in 2008 25.0 20.0 15.0 10.0 5.0 0.0 Q1-06 -5.0 Q2-06 Q3-06 Q4-06 F Y-06 Q1-07 Q2-07 Q3-07 Q4-07 F Y-07 Q1-08 -10.0 -15.0 Ateneo Center for Economic Research and Development

Government Finances, 2008 Goodbye, Balanced Budget Jan-Jun Fiscal Variables Revenues T ax Non-T ax Expenditures Surplus (Deficit) Full YearT arget '08 (P billion) (P billion) (P billion) 87.56 80.36 7.21 86.80 0.77 0.00 122.03 114.00 8.03 96.27 25.76 0.00 569.99 512.27 57.72 587.99 (18.00) 0.00 Jun '08 May '08 Ateneo Center for Economic Research and Development

How Does It All Feel From Below? Ateneo Center for Economic Research and Development

Fact: Poverty incidence worsened from 2003 to 2006. Family Income & Expenditures Survey: • Proportion of poor rose from 30% to 33% • Number of poor Filipinos increased by nearly 4 million • Poor families rose from 24.4% to 26.9% • Number of poor families increased by Ateneo Center for Economic Research and Development

Fact: Average Filipino family income had gone down in recent years. Family Income & Expenditures Survey: • Average annual family income fell from P148,000 in 2003 to P144,000 in 2006 (in constant 2003 prices) • First time FIES average real income fell • More consistent with tax revenue trends • Middle & lower income groups took the hit Ateneo Center for Economic Research and Development

Self Rated Poverty: Rising again

Hunger is on the rise anew…

…and climbs steeply in Metro Manila

What’s in store for the rest of 2008? Ateneo Center for Economic Research and Development

Storm Winds • US slowdown/recession ―Credit crisis now beyond sub-prime housing loans (auto loans, credit cards) ―Consumption & investment slowdown ―IMF: GDP growth 0.8% (vs. 2.6% in 2007) • Global economic slowdown ―US: 21% of China’s exports ―IMF: Global growth to moderate to 4.1% in 2008 (from 4.9% in 2007); emerging markets to 6.9% from 7.8% Ateneo ―GlobalCenter for Economic Research and Development food and oil price surge

Storm Winds The US Slowdown/Recession: The Plot Thickens ―Major automakers suffer 18% (GM), 21% (Toyota) & 28% (Ford) sales slump ―New unemployment claims top 380,000, a level associated with recession ―Starbucks announces >600 store closures and 12,000 job cuts ―“Slow motion recession” Ateneo Center for Economic Research and Development

US Store Closures ―Ann Taylor ―Eddie Bauer ―Cache ―Lane Bryant ―Talbots, J. Jill ―Gap Inc. ―Foot Locker ―Wickes (furn) ―Levitz (furn) : : : : : : : : : 117 stores Ateneo Center for Economic Research and Development 27 stores 20-23 stores 150 stores 78+22 stores 85 stores 140 stores out of business out of business

US Store Closures ―Zales, Piercing Pagoda : 105 stores ―Disney Store : 98 stores ―Home Depot : 15 stores ―Macy’s : 9 stores ―Movie Gallery : 140 stores, : 920 rentals ―Pacific Sunwear 153 stores ―Pep Boys : 33 stores Ateneo Center for Economic Research and Development

US Store Closures ―Sprint Nextel : ―Wilsons : ―Sharper Image: ―Bombay Co. : ―Kaybee Toys : ―Dillards : ―Ethan Allen : ―JC Penneys : Ateneo Center for Economic 125 locations 158 stores 90 stores 384 stores 356 stores scaling back scaling back scaling back Research and Development

The US Contagion A 10% drop in US: GDP: Merchandise Exports

Services Exports

FDI

Remittances

∆RP % % % % -0.70 -0.63 -0.04 -0.37 Total Impact 1.74 % Ateneo Center for Economic Research and Development -

10.0 15.0 20.0 25.0 0.0 5.0 Tax & Revenue Effort Dropped Anew Ateneo Center for Economic Research and Development Low Fuel 19 75 19 76 19 77 19 78 19 79 19 8 0 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

Excess Baggage • Governance Weaknesses ―Tax Evasion ―Smuggling ―Massive Graft & Corruption ―Regulatory Capture • Political Uncertainty ―Weakened Institutions ―Leadership instability (Cabinet reshuffles; weak Presidency) Ateneo Center for Economic Research and Development

Domestic Drivers Sustained overseas remittances fuels consumption spending Agricultural supply response to higher prices Rebounding private domestic investments (substantial announced investment intentions for the year) Ateneo Center for Economic Research and Development

Domestic Drags Rapid price increases slower consumption spending Weaker tax revenues slower government spending Rising interest rates Dampened investment, consumption Record high oil prices higher production, transport costs shifts in consumption patterns Ateneo Center for Economic Research and Development

Oil Price Outlook: Optimistic View Price bubble will eventually burst • Fundamentals have not changed as drastically as prices have • Dollar weakness & commodity markets • Overreaction (i.e., overbuying) by market players • Global economic slowdown will weaken demand, pull down prices Ateneo Center for Economic Research and Development

Oil Price Outlook: Pessimistic View to stay High oil prices are here • Rising supplies unable to match surging demands, especially from developing economies (e.g. China & India) • Resource prices generally up because of unrelenting global growth (no recession in the last 16 years) This is the more popular view; prudence is better than Ateneo Center for complacency Economic Research and Development

Food Prices Outlook (UN-FAO) • Prices expected to ease worldwide with coming harvest; however… • Prices not likely to return to former low levels due to: Escalating input costs (oil-related) Increased utilization by producers, diminished exportable surpluses Rising demands by fast-growing food-importing countries Development Ateneo Center for Economic Research and

Outlook for 2008: A Very Different Year • Growth in 2007 surprised all ―Partly a measurement issue ―Entirely due to government stimulus • 2008 a challenging year: ―Global and US slowdown ―Faltering revenue performance ―Rising interest rates ―Private Investment growth unable to offset the drags Ateneo Center for Economic Research and Development

Ateneo Macroeconomic Forecasting Model (AMFM) 2008 Projections from Econometric Model GDP Growth - 4.55.3% Inflation - 9.010.0% Unemployment - 7.58.5% Assumes: Exchange Rate - P44-45 Ateneo Center for Economic Research and Development

Currency Movements Weak $ no longer the main driver Ateneo Center for Economic Research and Development

Sectoral Gainers Gainers: Services: Finance (Banks & Insurance), Real Estate, Transport (Water and Air) Agriculture: Bananas, Corn, Forestry Industry: Mining, Utilities (Electricity) Slowdown: Communication, Business services Ateneo Center for Economic Research and Development

Sectoral Losers Negative Growth: Agriculture: Livestock, Other Crops Manufacturing: Wood & cork prods, Publishing/ printing, Electrical machinery, Textiles Rubber prods, Chemical prods, Basic metal industries, Paper prods Ateneo Center for Economic Research and Development

Sectoral Outlook: Near Term Slowdown: Motor vehicles, Consumer durables Electronics, Apparel, Recreation (Banks, Insurance) Real estate, Power, Transport Neutral: Food Mfg, Business Svcs (incl BPOs) Gainers: Agriculture, Mining Ateneo Center for Economic Research and Development

Finance

Sectoral Drivers & Imperatives Agriculture: stronger LGU roles; supply chain management Tourism: proper policy environment (open skies) Construction: durable govt revenues Mining: social & environmental responsibility, confidence building Real Estate, BPOs: vulnerable to US & global slowdown Ateneo Center for Economic Research and Development

Overall Imperatives • “Moderate the greed” (on both revenue and expenditure sides) • Deliberately pursue broad-based, inclusive growth (agriculture, SMEs) • It’s the governance, stupid: Restore public trust in government Restore investor confidence faith in our future! Ateneo Center for Economic Research and Development

Restore our

E-mail: [email protected] Ateneo Center for Economic Research and Development