Confronting Economic Slowdown

Costs, Challenges and Opportunities Cielito Cielito F. F. Habito Habito Ateneo Ateneo Center Center for for Economic Economic Research Research & & Development Development Ateneo Center for Economic

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Overview • Ten Key Economic Trends • Social & Economic Costs • Outlook for 2008-2009 – Challenges & Opportunities – Food and Oil prices: Outlook – Sectoral Winners & Losers – Imperatives Ateneo Center for Economic

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Ten Key Economic Trends The “Perfect Storm” 1. Prices are rising rapidly. 2. Large numbers of jobs are being lost. 3. Incomes/production have slowed down significantly. 4. Government spending has become a drag on growth. Ateneo Center for Economic

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Ten Key Economic Trends “The Perfect Storm” 5. Net foreign direct investments have fallen steeply. 6. Personal consumption dropped for the first time in recent memory. 7. Exports recover in Q2 after a steep drop in Q1. Ateneo Center for Economic

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Ten Key Economic Trends Silver Linings 8. Private domestic investment has rebounded (after years of “investment drought”). 9. Growth in net income inflows remained respectable. 10.Gross international reserves have surged since last year. Ateneo Center for Economic

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1. Prices are rising rapidly. Steepest rise in 17 years Year

Inflation Rate (%)

2003 2004 2005 2006 2007 Aug-08 Non-NCR Food Year Ave.

3.1 5.5 7.6 6.2 2.8 12.5 14.2 17.2 8.8

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ASEAN Inflation Rates (%) June 2008 % % 25.0 25.0 21.4 21.4

20.0 20.0

15.0 15.0 11.4 11.4 8.9 8.9

10.0 10.0 7.1 7.1

7.5 7.5

7.5 7.5

7.7 7.7

5.9 5.9

5.0 5.0

5.0 5.0

0.0 0.0 TW TWN N

KO KORR

C CHI HI

SIN SIN

TH THA A

M MAL AL

IN IND DO O

RP RP

V VN NM M

2. Large numbers of jobs were lost. April 2008 Labor Force Survey Employment (NSO-LFS) Unemployment Rate (%) New Definition

Jobs Generated ('000) Agriculture Industry Services

Underemployment Rate (%)

Latest Period

Year Ago

Prev 2007 Period Average

Apr '08

Apr '07 Jan '08

(Jan-Apr 2008)

8.0

7.4

7.4

7.7

-168 46 -244 30

1,005 572 21 413

149 156 4 -11

-10 101 -120 10

19.8

18.9

18.9

19.3

4

3. Incomes/Output slowed down significantly. Agriculture now leads growth Indicator GNP Growth (%) Net Factor Inc fr Abr GDP Growth (%) Agri, Fish & Forestry Industry Services

2006 FY

2007 FYf

Q1

Q2

6.1 13.3 5.4 3.8 4.5 6.7

8.0 16.5 7.2 4.9 7.1 8.1

5.8 18.3 4.7 2.7 3.0 6.5

5.5 14.1 4.6 4.9 4.8 4.3

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2008

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Industry Sector Performance: Mining Falls Steeply; Utilities Pick Up Sector INDUSTRY SECTOR Mining/Quarrying Manufacturing Construction Utilities

2006 FY

2007 FY

Q1

Q2

4.5 -6.1 4.6 7.3 6.4

7.1 25.9 3.4 23.1 6.7

3.0 14.1 2.4 -3.4 9.5

4.8 -18.5 6.1 8.3 7.9

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2008

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Services Sector Performance: Real Estate Exceptionally Strong Sector SERVICE SECTOR Trans, Comm & Stor Transport & Storage Communication Trade Finance Own Dwell & Real Est Real Estate Private Services Government Servcs

2006 FY

2007 FYf

Q1

Q2

6.7 6.3 3.1 9.0 6.1 11.4 5.7 17.1 6.9 4.7

8.1 8.3 6.1 10.1 8.2 13.1 5.9 18.1 8.4 2.6

6.5 5.6 7.3 4.4 5.8 12.2 7.3 21.6 5.7 4.0

4.3 3.3 4.2 2.6 4.3 2.4 7.3 21.7 6.2 2.4

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2008

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Sectoral Gainers Gainers:
Services: Real Estate, Finance (Banks & Insurance), Water Transport, Wholesale
Agriculture: Sugarcane, Bananas, Corn, Palay, Coconut, Poultry
Industry: Utilities (Electricity), Food & Beverages, Tobacco, Footwear, Leather Prods

Slowdown:
Construction, Communication, Finance, Land & Air Transport, Private Services Ateneo Center for Economic

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Sectoral Losers Negative Growth:  Agriculture: Livestock, Other Crops, Forestry  Mining: Nickel, Chromium  Services: Education  Manufacturing:
Textiles, Wood & cork prods, Publishing/ printing, Electrical machinery, Rubber prods Ateneo Center for Economic

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Where did the growth come from? Growth in Regional GDP 10.0 9 .4

Metro Manila

9.0

7 .8

8.0

7 .7 7 .2

Northern Mindanao

8 .7

Mimaropa

Central Visayas

7.7

7.2

7.0

8.6

Caraga

7 .9 7 .4 6 .7

6 .6

6 .7

6 .1

5 .8

6.0 5 .5

5 .4

5.0 4.0 3 .2

3.0

Eastern Visayas

2.0 1.0

I

M

II X

II

I

A

R

M

X

X

X

IX

I

II

II V

I

V

V

V

B IV

A

I II

IV

I

R

II

C

A C

N

R

P

R

0.0

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Revisiting 2007 GDP Growth: What pushed it beyond 7%? • Production (S) side:
Mining (26%)
Construction (23%)
Real Estate (18%)
Finance (13%)
Communication (10%)

• Spending (D) side:
Government Consumption (8.3%)
Public Construction (29.6%) Ateneo Center for Economic

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4. Government spending is now a drag. 2006 FY

2007 FY f

Q1

Q2

P e rs o n a l C o n s n E x p

5 .5

5 .8

5 .2

3 .4

G o v t C o n s u m p tio n

6 .1

8 .3

1 .9

- 5 .1

C a p ita l F o rm a tio n O f w h ic h : C o n s tru c tio n P u b lic P riv a te D u ra b le E q p t B r S tc k & O rc h D e v

2 .7

1 1 .2

4 .0

1 4 .7

5 .5 2 4 .7 - 3 .7 - 1 .8 - 0 .4

2 1 .3 2 9 .6 1 5 .9 4 .5 4 .5

- 3 .1 - 1 2 .9 2 .6 8 .6 - 2 .0

8 .1 - 6 .4 2 5 .0 4 .0 - 5 .0

E x p o rts Im p o rts

1 1 .2 1 .9

5 .6 - 4 .5

- 6 .1 - 5 .8

7 .7 - 1 .0

In d ic a to r

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2008

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Government Finances, 2008 Goodbye, Balanced Budget Jan-Jul '08 Fiscal Variables (P billion) (P billion) (P billion) Revenues Tax Non-Tax Expenditures Surplus (Deficit) Full YearTarget

July '08

Jun '08

101.42 89.27 12.14 116.85 (15.43) 0.00

87.56 80.36 7.21 86.80 0.76 0.00

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671.40 601.69 69.71 704.84 (33.44) 0.00

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5. Net Foreign Direct Investments dropped steeply. Annual Growth Rate (%)* 2007 2008 Foreign Direct Investments Equity Capital Reinvested Earnings Other Capital

180.8 177.9 -20.3 1,049.0

-68.5 -79.2 -4.7 -58.7

*Based on Jan-May figures (Source: BSP) Ateneo Center for Economic

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ASEAN Investment Growth Ave. Annual Growth Rates, 2002-2006 (%) 1 9 .7 2 0 .0

1 8 .1

1 8 .0

1 6 .0

1 4 .0

1 1 .1

1 2 .0

1 0 .0

7 .5

8 .0

6 .0

4 .2

4 .0

2 .0

4 .7

3 .1

0 .0

0 .2

0 .0

- 2 .0

RP

LAO

SIN

MAL

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6. Personal consumption has slowed down markedly • Year-on-year: PCE grew 3.4% in Q2 2008 (Q2 2007 was 5.6%) • Quarter-on-quarter: PCE actually fell 0.3%, vs. past average of 1.3-1.5% q-o-q
First time consumption spending has fallen in recent memory Ateneo Center for Economic

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7. Exports recover after a steep Q1 decline. 2 5 .0

2 0 .0

E x p o rtG ro w th 1 5 .0

1 0 .0

5 .0

0 .0 Q 1-06

Q 2 -0 6

Q 3 -0 6

Q 4 -0 6

FY -0 6

Q 1-07

Q 2 -0 7

Q 3-07

Q 4 -0 7

F Y -0 7

Q 1 -0 8

Q 2 -0 8

- 5 .0

Im p o rt G ro w th -1 0 .0

-1 5 .0

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8. Private investment spending has rebounded. 2006 FY

2007 FYf

Q1

Q2

P e rso n a l C o n sn E x p

5 .5

5 .8

5 .2

3 .4

G o v t C o n su m p tio n

6 .1

8 .3

1 .9

-5 .1

C a p ita l F o rm a tio n O f w h ic h : C o n stru c tio n P u b lic P riv a te D u ra b le E q p t B r S tc k & O rc h D e v

2 .7

1 1 .2

4 .0

1 4 .7

5 .5 2 4 .7 - 3 .7 - 1 .8 - 0 .4

2 1 .3 2 9 .6 1 5 .9 4 .5 4 .5

- 3 .1 - 1 2 .9 2 .6 8 .6 - 2 .0

8 .1 -6 .4 2 5 .0 4 .0 -5 .0

E x p o rts Im p o rts

1 1 .2 1 .9

5 .6 - 4 .5

- 6 .1 - 5 .8

7 .7 -1 .0

In d ic a to r

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2008

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9. Growth in net income inflows remains high. • Net Factor Income from Abroad grew a healthy 15.9% in H1 2008 • Partly due to drop in outflows (-4.8%) • Wage remittances grew 11.1%; property income inflows fell 5.1 % Ateneo Center for Economic

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10. Gross foreign reserves grew by almost 50% • Gross international reserves up to $36.9B from $28.0B last year • Now 6 months’ worth of imports, up from 4.6 months • Mainly due to BSP operations to prevent faster peso rise • Situation has now reversed Ateneo Center for Economic

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Currency Movements Weak $ no longer the main driver

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Economic and Social Costs

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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 700,000 Ateneo Center for Economic

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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 real terms, i.e. constant 2003 prices) • First time FIES average real income fell • Middle & lower income groups took the biggest hit • Share of labor income in GDP is falling Ateneo Center for Economic

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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

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Self Rated Poverty: Rising anew

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Hunger has also risen again … again…

… and climbed steeply in …and Metro Manila

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Other human development indicators have worsened • Enrollment rates in elementary school are declining • Drop-out rates are rising • Protein & calorie malnutrition among children are rising in many areas Ateneo Center for Economic

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What’s the outlook for the rest of 2008 & 2009? Ateneo Center for Economic

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The US Slowdown: And The Plot Thickens ― “Slow motion recession” ― Fannie May/Freddie Mac bail-out ― Car sales slump by 18% (GM), 21% (Toyota) & 28% (Ford) ― Job losses continue to mount ― Starbucks announces >600 store closures and 12,000 job cuts ― Widespread store closures and job cuts announced Ateneo Center for Economic

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US Store Closures ― Ann Taylor ― Eddie Bauer ― Cache ― Lane Bryant ― Talbots, J. Jill ― Gap Inc. ― Foot Locker ― Wickes (furn) ― Levitz (furn) Ateneo Center for Economic

: : : : : : : : :

117 stores 27 stores 20-23 stores 150 stores 78+22 stores 85 stores 140 stores out of business out of business Research and Development

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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

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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

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Tax & Revenue Effort Faltering 25.0

Revenues/GDP

20.0

15.0

Taxes/GDP 10.0

5.0

07 20

03

01

99

97

05 20

20

20

19

93

91

95

19

19

19

89

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19

85

87 19

19

81

83 19

19

77

79 19

19

19

75

0.0

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Non-economic Impediments • Governance Weaknesses ―Tax Evasion ―Smuggling ―Massive Graft & Corruption ―Regulatory Capture

• Political Uncertainty ―Weakened Institutions ―Leadership instability (Cabinet reshuffles; weak Presidency) Ateneo Center for Economic

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Oil Price Outlook: Opposing Views Optimistic View: • Overbuying) by market players due to $ weakness, panic • Global economic slowdown will weaken demand, pull prices back down Pessimistic View: • Rising supplies unable to match surging demands, especially from China & India) • Higher prices are here to stay Ateneo Center for Economic

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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 foodimporting countries Ateneo Center for Economic

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Domestic Drivers  Sustained overseas remittances
fuels consumption spending  Agricultural “supply response” to higher prices  Rebound in private domestic investments (replacement investment & technology upgrades) Ateneo Center for Economic

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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 (e.g. less eating out, car pooling, MRT) Ateneo Center for Economic

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Sectoral Outlook: Near Term Slowdown:
Motor vehicles, Consumer durables
Electronics, Apparel, Recreation
Finance (Banks, Insurance)
Power, Transport Neutral (at pace with overall growth):
Food Mfg, Business Services Gainers:
Agriculture, Real Estate, Tourism(?) Ateneo Center for Economic

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Ateneo Macroeconomic Forecasting Model (AMFM) 2008 Projections from Econometric Model GDP Growth Inflation Unemployment Assumes: Exchange Rate Crude Oil Price Ateneo Center for Economic

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4.5-5.3% 9.0-10.0% 7.5-8.5% P45 $120

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Where Do We Need To Push?  Agriculture: budget reform; transparency mechanisms; stronger LGU roles  Tourism: more liberal aviation policy environment; focused investments  Construction: durable govt revenues  Real Estate, BPOs: mixed effects from US & global slowdown  Mining: social & environmental responsibility, confidence building Ateneo Center for Economic

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Addressing the Countryside Penalty July-August price increases:  4x faster in the provinces (0.4%) than in Metro Manila (0.1%)  Prices of services rose 8x faster in provinces vs. Metro Manila  Food prices fell in Metro Manila, rose in the provinces  Prices of fuel, light & water stood still in Metro Manila, rose 0.8% in provinces Ateneo Center for Economic

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Addressing the Countryside Penalty And yet Metro Manila:  Already accounts for one-third of the country’s total incomes  Accounts for close to half of the economy’s total income growth  Enjoys a lion’s share of the infrastructure budget  Receives government subsidy assistance indiscriminately Ateneo Center for Economic

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Broadening Economic Development • Need to reverse anti-countryside bias of economic policies, interventions and outcomes • Growing hope in successful LGU initiatives • National government should limit itself to “steering,” let LGUs do the “rowing”

• There is hope: Well-managed LGUs are showing the way Ateneo Center for Economic

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

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