Quo Vadis Philippines

Quo Vadis, Philippines? UP Alumni Association Cagayan de Oro May 21,2009

Outline • I. Economic Performance • II. Prospects

Economic Performance • Silver Linings: The Big Picture – We’re no longer the basket case of Asia – We’ve been growing at a faster pace over a longer period of time than any other period in the past 22 years: • • • •

–

Aquino (1986-1992): Ramos (1992-1998): Estrada (1998-2000): Arroyo (2001-2008):

4.0% 3.8% 2.9% 5.4%

Some more silver linings • Employment increased by 565,000 between Jan 2008 and Jan 2009 • Underemployment decreased (18.9% to 18.2%) • Percentage of wage and salaried workers increased (51.7% to 52.3%)

Still more… • Inflation in 2008 remained at single-digit level (9.3%) despite spikes in world fuel and rice prices -- headline inflation decreased by 450 basis points between August and December. Feb, March, April inflation 7.3%, 6.4%, 4.8% • Gross Official Reserves reserves are at a healthy 5.9 months of imports ($30.3b)as of February. (End April: $39.5nb)

and still some more.. • National government deficit (0.9% 1.2% of GDP) very manageable (now expected to go up to 3.1% by private • Current Account surplus maintained • OFW deployment and remittances are still increasing (latest figures February)

and still some more… • Jan-Feb OFW remittances at $2.6 billion, 2.5% more than a year ago (BSP) • Jan-Feb OFW deployment 27.3% higher than same period last year -283,348 vs 222,608

What this all means is: • The Philippines is facing the global economic crisis from a much better macroeconomic position than it did in previous downturns (1998, 1991, 198385) • Bonus: banking sector resilient, robust. No credit crunch.

Here comes the bad news: (the list is long) The economy suffered a steep decline in its growth rate in 2008 (from 7.2% to 4.6%) and further decline is already visible from the latest economic indicators Agriculture and Service sector “underperformed” in 2008; in 2009, it looks like the Manufacturing subsector is going to be the hardest hit: Average capacity utilization in January 2009 is 77.5 (50% of industries have capacity utilization of 80% and above)

Bad News… • Unemployment rate increased (7.4% to 7.7%),and there is potential for further weakening of the situation. • Imports, exports, are sharply down since October, and remittances have also decelerated sharply since October. Jan 2009 exports down 41% (electronics exports -48.4%), imports down 34%

Bad news…. • Portfolio investments for the year showed a net outflow of $1.4 b (from a net inflow of $3.1b in 2007) • FDI negligible ($1b) • tax and revenue effort declining • Production costs remain high, squeezing corporate profits-- WPI and PPI continue to be high (20.6% and 8.5% respectively as of end of last year)

Some more bad news… • Public sector-, national governmentdebt, and external debt- to-GDP ratios, which had been declining considerably (rapid pace of debt reduction), are now expected to increase for 2009.

Bad News: In the War against Povery, Poverty is winning Poverty Incidence, by administration Marcos Aquino Ramos Estrada Arroyo

36.5% 30.1 20.5 22.3 22.1

What all this means: • While the Philippines is in better shape than ever before to face a global downturn, there is no escaping the fact that it will be affected, due to its openness and lack of diversity (exports to GDP ratio has dropped from 50% to 34%, but electronics accounts for 60% of total exports).

Aggravating Factor: • “Stimulus” package of government is too small, too vague, and no plans to monitor – Too Vague: • • • •

Government estimate: P300 billion (3.75% of GDP) Salceda estimate: P7 B (0.08%) Legislative plan: P50 B (0.62%) Based on increase in budget deficit (from original plan): P76.2B (0.95%) • Not clear where the money will go • No provisions for special monitoring (chances of wastage great, particularly in a pre-election year)

Stimulus -- or lack of it Too Small:-- Comparing stimulus packages: Singapore: 5% of GDP US: 6% Malaysia: 8% (Note: This is 2nd round) China: 18% ($586 B)

II. Prospects • Global Prospects: Dim – IMF has adjusted its forecasts of world economic outlook downward four times in a row. – WB predicts recession in 2009 for US (-0.5%) and the Eurozone (-0.6%), with Japan expected to grow at 0.1% – World trade, which grew by 5.9% last year, is predicted to contract by 2.1% this year.

Prospects • Philippine Prospects: Dimming – Various Projections • • • • • • • •

Credit-rating agencies -- 2% IMF -- 2.25% WB -- 3.0% Citigroup -- 3% DB -- 2.0% (down from 3.3% in January) IDEA -- 3.4% - 4.1% PIDS -- 4% NEDA -- maximum 4%

Prospects • A little bit of history: Seven times in the last 25 years, GDP growth rates were less than 2%. • 1983 1.87 1991 (0.58) 1984 (7.32) 1992 0.34 1985 (7.32) 1998 (0.58) 2001 1.76

Prospects • A little bit of comparison: 2009 macroeconomic projections for selected countries in Emerging Asia • Forecasted 2009 Real GDP growth rates (%) China 7.0 Hongkong -4.0 Indonesia 4.5 Malaysia 3.0 Philippines 3.2 Singapore -4.5 Thailand 1.5 Emerging Asia excluding China and India 0.8

7.0 -5.0 4.0 0 2.0 -5.0 -2.5

7.5 -5.0 4.0 0.0 2.0 -9.0 -6.0

-2.5

-2.1

Prospects • Forecasted 2009 Fiscal Balance (% of GDP) China (2.0) (3.0) Hongkong (7.4) (5.0) Indonesia (1.7) (1.7) Malaysia (4.5) (7.4) Philippines (1.7) (2.2) (3.1) Singapore 3.3 2.1 Thailand (4.3) (4.0)

Prospects • Other projections for the Philippines – Foreign exchange rate (P/$) 45 - 47 – Interest rate 4-6% – Inflation rate 4-4.4% – Unemployment rate 6.8-7.0%

Summary • Growth expected to slow considerably given – lower export demand from developed countries, – lower private consumption due to declining real income and higher unemployment – lackluster investment due to risk aversion, high costs of financing, and reduced growth prospects – Ineffectiveness of government intervention

Portent of things to come? • 10 of the 11 leading economic indicators (LEI) for the first quarter of 2009 have have turned negative. • (1) consumer price index, (2) electric energy

consumption; (3) exchange rate, 4) hotel occupancy rate, 5) money supply; 6) number of new business incorporations, 7) stock price index, 8) terms of trade index, 9) total merchandise imports, 10) tourist arrivals, and 11) wholesale price index.

Portent of Things to Come • What could reverse the prognosis? (a) If the stimulus packages of other countries are effective. (b) if our stimulus package is large enough and effective.

Last Comforting Statement: • Remember: The Philippine economy is slowing down. But it has not as yet contracted. Slowdown vs recession. •

THANK YOU