Salceda Briefing Presentation

THE PHILIPPINES: A NATIONAL RESPONSE TO THE GLOBAL CRISIS A Briefing Presentation to PGMA

Governor Joey Salceda 12 November 2008

WHAT’S THIS CRISIS • It is a global crisis • Complexed crises: Two distinct but related 1. 2.

Financial meltdown coinciding with Cyclical recession in the real economy

• What lies ahead? Deep and long recession –

–

Sharp initial shocks and protracted slowdown with false recoveries prompted by state interventions with shortlived and mostly counterproductive impact L-shaped more like Japan post-Plaza Accord

• Some positive relief from fuel and food price spikes having peaked – –

correcting by 60% from peak now lower than their long-term inflation-adjusted average

Global Equities Markets Performance US Markets Nasdaq S&P 500 DJIA

2007 Price High 2,861.5 1,576.1 14,198.1

Current Price 1,552.0 876.8 8,379.0 Average

Other Major Markets Japan (Nikkei) France (CAC) Germany (DAX) Australia (All Ordinaries) U.K. (FTSE)

18,295.0 6,168.2 8,151.6 6,873.2 6,751.7

7,649.1 3,193.8 4,295.7 3,869.4 3,883.4 Average

Asian Markets China (Shanghai Comp) Hong Kong (Hang Seng) Singapore (STI) India (BSE Sensex) Indonesia (JCI) Korea (Kospi) Taiwan (Taiex) Thailand (SET) Philippines (PSEi) Malaysia (KLCI)

6,124.0 31,958.4 3,906.2 21,206.8 2,838.5 2,049.6 9,859.7 924.7 3,896.7 1,524.7

1,932.4 12,618.4 1,600.3 8,701.1 1,244.9 938.8 4,579.6 432.9 1,953.5 859.1 Average

Source: Bloomberg

%Chg from Peak -45.8% -44.4% -41.0% -43.7% -58.2% -48.2% -47.3% -43.7% -42.5% -48.0% -68.4% -60.5% -59.0% -59.0% -56.1% -54.2% -53.6% -53.2% -49.9% -43.7% -55.8%

RISKS TO PHILIPPINE REAL ECONOMY • Exports – 36% of GDP (US$57bn) vs 47% ave. Asia – 17% direct to the US but indirect adds 18% for 35% – Export slowdown is global – Aggregate exposure and product mix are more important

• OFWs- 12% of GDP (US$16bn) – “Investment content” is most at-risk

• Tourism- 3% of GDP (US$4.5bn) – Rising personal bankruptcies / bad mortgages – 92% from non-Asean

• BPOs- 3% of GDP (US$4.5bn) – Lost volumes from some big-ticket principals especially in the financial sector – Higher vacancy as office space completed 501,000sqm in 2008 from 330,000 in 2007

• Impact on overall business and consumer confidence

RP most exposed to non-Asean traffic Tourist arrivals in ASEAN as of 14 March 2007 in thousand arrivals Country The Philippines Myanmar Viet Nam Cambodia Thailand Singapore Indonesia Lao PDR Malaysia Brunei Darussalam ASEAN

Total 13,394.6 2,966.3 17,364.3 6,269.3 68,019.3 48,203.6 27,428.4 4,791.2 81,681.6 2,921.1 273,039.6

2001-2006 % to Total IntraExtraIntraExtraASEAN ASEAN ASEAN ASEAN 892.9 12,501.7 7% 93% 304.8 2,661.4 10% 90% 2,211.1 15,153.2 13% 87% 975.8 5,293.5 16% 84% 17,080.2 50,939.0 25% 75% 17,376.6 30,827.0 36% 64% 11,998.9 15,429.5 44% 56% 3,483.8 1,307.4 73% 27% 62,561.7 19,119.9 77% 23% 2,571.5 349.6 88% 12% 119,457.4 153,582.3 44% 56%

Dim and dimmer

Global economy generally slowing down even before meltdown

Source: IMF

Domestic Demand Annual Growth in Real Terms

Domestic economy similarly slowing down

30 25 20 15 10 5 0 -5 -10 -15 -20 -25 1995

1996

1997

1998

1999

2000

Government Spending Source: BSP Q32008 Inflation Report 7

2001

2002

2003

Private Consumption

2004

2005

2006

Fixed Investment

2007

2008

POSITIVE SECULAR TRENDS: SIDELINED OR OVERWRITTEN • Demographic transition still well on its way – Non-traditional labor markets (eg EU) for OFWs are rising enabling +27% deployment in the first seven months – Adjustment to resource depletion but too slow process to achieve stabilization and a more sustainable equilibrium being overwritten by BRICS

• Wage convergence still at play – Impact is suspended or sidelined as it is being overwritten by the expediencies of the global crisis

Source: ww.worldbank.http://www.worldbank.org/depweb/beyond/global/chapter8.html

IMPACTS ON POVERTY • First direct impact: jobs losses and stagnant incomes • Welfare = Jobs x Incomes less Costs – Jobs- 1% or 310,000 jobs losses with 50,000 OFW and 260,000 domestic – Incomes- likely to be stagnant with weaker business formation and expansion and 1.5m new entrants yearly – Costs- WTI now at US$70/barrel from US$147 and Rice at below US$600/MT from US$1,272

• Increase in Welfare = Cost relief > Jobs losses and Stagnant Incomes but: •

Pockets of “concentrated severity”

INFLATION: Peaked in August 2008 January February March April May June July August September October November December

MoM Infprices 2009 LowerCPIcommodity but peso 146.8 weakness 1.70 4.9puts January 147.3 0.50 5.4 February new pressure

Average

148.6 151.6 153.8 157.4 159.8 160.4 159.8 159.2 159.2 159.2 155.2

1.30 3.00 2.20 3.60 2.37 0.60 -0.60 -0.60 0.00 0.00 1.17

6.4 8.3 9.5 11.4 12.2 12.5 11.9 11.2 10.5 9.7 9.5

March April May June July August September October November December Average

CPI 160.2 161.0 161.8 162.7 163.5 164.3 165.2 166.0 166.8 167.6 168.5 169.3 164.7

MoM 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83

Inf 9.1 9.3 8.9 7.3 6.3 4.4 3.4 3.5 4.4 5.3 5.8 6.4 6.2

P/$ Rate Monthly Chart (1998 to present) 58.00 55.00 52.00 49.00 46.00

PESO is key risk to inflation

43.00 40.00 37.00 34.00 31.00 28.00 25.00

Source: Reference Exchange Rate Bulletin, Treasury Dept., BSP

IMPACTS ON POVERTY • Second major impact: reduced fiscal capacity to pursue poverty-relieving social programs and jobs-creating infrastructure – Fiscal incidence of Philippine budget mostly progressive

• States’ revenues already in the US by 6% inflation-adjusted • Window for countercyclical deficit spending has significantly narrowed – Economic stimulus funded by deficit comes with elevated risk of triggering higher interest rates that could deter private capital outlay thus negating positive impact of public spending

IMPACTS ON POVERTY • Adverse fiscal impact of financial meltdown: – (1) Tighter credit: Bond markets are likely to be tighter and more expensive • Foreign borrowings in first nine months of P51bn versus P103bn in 2007 • Credit spreads on emerging sovereign bonds have widened to 630 bps partly due to lower US Tnote • Reflow of gross repayments to multilaterals (currently, RP is net payer) is most reliable source

• Adverse impact of global economic slowdown: – (2) Revenue weakness: Revenues will be hurt by lower GDP growth even customs feeling the brunt of curtailed trade finance • Revenue weakness will coincide in 2009 with structural constraints – Minimum wage relief- P36bn – Lower corporate income tax- P18bn

GLOBAL OUTLOOK • “Excessive hopes” pinned on global summit building on consensus emerging from EU and Asia summits and Obama election – – – –

New architecture, new norms and new oversight Will only allow governments to print money and incur debt Still no mention of resource depletion One-party administration in the US tending to be dysfunctionally inward-looking/domestic-oriented viz auto bailout

• Rapid reconcentration of financial resources into reserve currency countries – US, EU, Japan (sudden flight) – Depositors/investors flocking to US / UK Treasuries – Treasury owning banks and banks foreclosing on industries – Emerging economies starting to need bailing out • Being pushed out by global credit markets • 7 countries – including Hungary, Ukraine, Iceland, Romania Pakistan even Brazil

Chart 1: Assets Under Management

Asset Managers, FX Reserves & SWFsFund Managers $80trn 80

USD Trn

60

40

Central Banks $6trn Middle East $2trn

20

0 2001 Source: UBS FX Strategy

2002

2003

2004

2005

2006

2007

2008

Chart 2: Financial Sector Assets

Financial Sector Asset Holdings 40

90

30 60

) SD s(U tre o lC a ivu d In

30 10

0

0 2001 US

Source: UBS FX Strategy

2002 Euro

2003 Canada

2004 UK

2005 Japan

2006

2007 Swiss

2008 G10 Total (RHS)

) rn SD l(U ta o T 0 1 G

20

Chart 1: Cumulative financial account flows into ASEAN economies since Q1 1999

es since Q1 1999 20

USD bn Rising cumulative inflow

0

-20

-40 Rising cumulative outflow

-0 7

-0 7

-0 8

p e S

r a M

-0 6 r a M

r a M

-0 5 p e S

-0 6

-0 5 r a M

Malaysia

p e S

-0 4

-0 4 r a M

Thailand

p e S

-0 3 p e S

-0 2 r a M

-0 3

-0 1 p e S

r a M

-0 1 r a M

Source: CEIC, Haver, UBS

-0 2

-0 0 p e S

Philippines

p e S

-0 0

-9 9 p e S

r a M

-9 9 r a M

-60

Indonesia

Table 1: Indicators of pressures on ASEAN currencies Singapore

Thailand

Malaysia

Indonesia Philippines

Change in exchange rate (currency per US dollar) from 4.7% 3.5% 8.2% 17.0% 19.7% 31 Dec 2007 to 28 Oct 2008 Change in FX reserves + forward reserves since + 14.9bn + 10.5bn + 13.1bn + 0.2bn* - 4.2bn December (assuming forward reserves unchanged in Sept) Change in FX reserves + forward reserves from peak - 34.8bn - 23.6bn - 32.4bn - 3.5bn* - 9.1bn (assuming forward reserves (Apr-08 peak) (Mar-08 peak) (Apr-08 peak) (Jul-08 peak) (Feb-08 peak) unchanged in Sept) Decline in FX reserves as a % -13.0% -17.8% -22.4% -5.7% -18.6% of peak reserves Current account balance, 15.4% 3.8% 13.6% 1.9% 2.2% Q1 2008 (% of GDP) Current account balance, 13.5% -1.4% 19.6% -1.1% 2.0% Q2 2008 (% of GDP) *Note: data on forward reserve position is unavailable Source: UBS

Chart 3: US Asset Managers

US Asset Managers, FX Reserves & SWFs 30.0 25.0 20.0

s n rilo T D S U

15.0 10.0 5.0 0.0 1990

1992

1994

US Asset Managers Source: UBS FX Strategy

1996

1998

2000

Central Bank FX Reserves

2002

2004

Middle East

2006

2008

Chart 4: Foreign Assets As Share Of Total Assets, Mutual Funds

70%

70%

60%

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%

0% 2000

2001

2002

2003

2004

2005

2006

2007

2008

Swiss Unit Trusts

Sweden Mutual Funds

UK Unit & Investment Trusts

Canada Mutual Funds

Japan Investment Trusts

US Mutual Funds

Euro Money & Financial Funds

Source: UBS FX Strategy

Percntag

Percntag

Foreign Assets As Share Of Total Assets

Table 2: International investment position (2007) % GDP Total assets FDI assets Portfolio assets Portfolio assets: equities Portfolio assets: bonds Other assets (bank loans/trade credit etc.) Official reserve assets Memo: Assets net of FDI

Singapore Malaysia Philippines Indonesia Thailand 521.5 115.7 46.3 21.8 59.6 100.7 30.0 3.8 0.1 3.3 116.6 7.9 4.6 0.7 6.0 71.5 6.5 0.1 0.1 1.3 45.1 1.4 4.4 0.6 4.7 207.8 25.3 14.6 7.8 14.1 96.5 52.3 23.3 13.2 35.6 420.8 85.7 42.5 21.7 56.3

Total liabilities FDI liabilities Portfolio liabilities Portfolio liabilities: equities Portfolio liabilities: bonds Other liabilities (bank loans/trade credit etc.) Memo: Assets net of FDI

429.8 138.0 102.6 91.2 11.4 189.2 291.8

118.5 39.5 53.1 35.0 18.1 25.6 79.0

65.2 13.8 23.2 7.0 16.2 28.2 51.4

56.4 13.7 16.4 9.6 6.8 26.4 42.8

83.1 38.6 25.9 23.0 6.3 18.3 44.5

Net assets Memo: Net assets ex-FDI

91.7 129.0

-2.8 6.7

-18.9 -9.0

-34.7 -21.1

-23.5 11.8

92.1% 237.4%

121.1% 268.3%

197.3% 501.6%

79.3% 219.7%

4.5%

2.9%

1.1%

2.4%

30.2%

14.5%

25.5%

10.3%

Non-FDI assets against non-FDI liabilities: Net forex equity Non-FDI liabilities/(assets ex FDI) 69.3% liabilities (excluding Non-FDI liabilities/(assets ex FDI and reserves) 90.0% foreign debt) 1% change in portfolio assets as a % of daily FX 0.9% market turnover 1% change in portfolio liabilities as a % of daily 0.8% FX market turnover Source: UBS, Haver, IMF

2007-2008 (Jan-June) Balance of Payments Item & FINANCIAL ACCOUNT SignsCAPITAL of economic involutionAccount back Capital toCredit: our cave Receipts Debit: Disbursements Financial Account Direct Investment Debit: As s ets , Res idents ' Inves tm ent Abroad Credit: Liabilities , Non-Res idents Inves tm ents

Portfolio Investment Debit: As s ets , Res idents ' Inves tm ent Abroad Credit: Liabilities , Non-Res idents Inves tm ents

Financial Derivatives

Debit: As s ets , Res idents ' Inves tm ent Abroad A new WTO deal would do more Credit: Liabilities , Non-Res idents Inves tm ents than allOther the bailouts in helping Investment Debit: As s ets , Res idents tm ent Abroad the real economy as ' Inves it optimizes Credit: Liabilities , Non-Res idents Inves tm ents the positive impacts of stimulus Change in Commercial Banks' NFA packages

NET UNCLASSIFIED ITEMS OVERALL BOP POSITION

Source: BSP

January - June Grow th 2007 /r 2008 /p Rate (%) TRADE ACCOUNTS? 144 (6) 57 63

Regime 1,197 of 731.3 less exports, less imports 30 600.0 57 27

150 (1,415) 3,348 1,933

1,167 742 71 813

2,347 516 2,863

(191) (2,101) (2,292)

0.0 (57.1) 678.0 To FDI, 152.4 AIG US$1.5b (97.9) of Philamlife (57.9) (108.1) (507.2) (180.1)

Reverse capital 82.0 (365.9) from portfolio (14.1)

(150) (41) (191)

(27) (191) (218)

(632) 3,332 2,700

643 (1,663) (1,020)

201.7 (149.9) (137.8)

(537)

(970)

(80.6)

(537)

(970)

(80.6)

3,187

1,934

sale

(39.3)

flow

2007-2008 (Jan-June) Balance of Payments Item CURRENT ACCOUNT

Growth Rate (%)

3,580

1,707

(52.3)

(2,859) 28,043 30,902

(5,751) 30,160 35,911

(101.2) 7.5 16.2

Goods Credit: Exports Debit: Imports Services Credit: Exports Debit: Imports

(3,167) 24,169 27,336 308 3,874 3,566

(6,404) 25,156 31,560 653 5,004 4,351

(102.2) 4.1 15.5 112.0 29.2 22.0

Income Credit: Receipts Debit: Disbursements

(407) 2,468 2,875

(68) 3,256 3,324

83.3 31.9 15.6

Current Transfers Credit: Receipts Debit: Disbursement

6,846 7,034 188

7,526 7,727 201

9.9 9.9 6.9

Goods and Services Exports Imports

Source: BSP

January - June 2007 /r 2008 /p

Total Balance of Payments (1999-2007) 1 PHILIPPINES: BALANCE OF PAYMENTS (in US$m) CAPITAL AND FINANCIAL ACCOUNT

Capital Account Cre dit:

Re ce ipts

De bit:

Paym e nts

Financial Account

Inflows at risk to outflows via dividends and capital repatriation

Dire ct Inve s tm e nt

2007 r/

Total (1999-2007)

2889

13749

24

663

108

1049

84

386

2865 -514

9307

Debit: Assets, Residents' Investments Abroad

3442

4799

Credit: Liabilities, Non-Residents'

2928

14106

4382

14284

Debit: Assets, Residents' Investments Abroad

-813

4728

Credit: Liabilities, Non-Residents'

3569

19012

-288

-544

Debit: Assets, Residents' Investments Abroad

-170

-924

Credit: Liabilities, Non-Residents'

-458

-1468

-715

-9961

Debit: Assets, Residents' Investments Abroad

4852

11362

Credit: Liabilities, Non-Residents'

4137

1401

Investments in the Phil.

Portfolio Inve s tm e nt

Financial De rivative s

Investments in theflows Phil. Portfolio remain most significant risk

Investments in the Phil.

Othe r Inve s tm e nt

Source: BSP

Investments in the Phil.

Gross International Reserves Healthy Reserves for now

Source: BSP

GIR to GDP Ratio (since 1997 devaluation) Year

GIR (US $m )

P

1999 2000 2001 2002 2003 2004 2005 2006 2007 Mar-08 Jun-08 Sep-08

15,147.31 15,062.82 15,692.23 16,364.76 17,063.06 16,227.91 18,494.36 22,966.72 33,751.05 36,624.01 36,712.28 36,691.68

Source: BSP for GIR & P-$ Exchange Rate NSCB for GDP current

GDP

P/$ Rate

(current, Pm ) (end of period)

GDP (US $m )

40.3130stable Relatively 73,845 3,354,727 49.9980 67,097 3,631,474 51.4040 70,646 3,963,873 53.0960 74,655 4,316,402increase US$14bn in GIR 77,676 55.5690 4,871,555 56.2670 86,579 5,444,039 53.0670 102,588 6,032,835 49.1320 122,788 6,648,245 41.4010 160,582 7,446,034 41.8680 177,845 7,446,034 44.7560 166,370 46.9170 7,446,034 158,707 0.0019% 2,976,905

GIR/GDP 20.51% 22.45% 22.21% 21.92% 21.97% 18.74% 18.03% 18.70% 21.02% 20.59% 22.07% 23.12%

Broad Money Liabilities (M3) Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 30.0

16.7 19.3 22.7 21.9 22.0 24.7 26.1 20.5

19.4 18.7

25.0

20.0

15.0

10.0

Entry of virus?: Pesos created by new forex inflows must now be proportionally contained with forex outflows!

5.0

Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08

Source: BSP

NG Foreign Bonds

1995

2000

2001

2002

2003

2004

2005

2006

2007

Change 2008 1995-2008

TOTAL

1,158,622 2,166,710 2,384,917 2,815,468 3,355,108 3,811,954 3,888,231 3,851,506 3,712,487 3,966,069 2,807,447

Domestic Debt NG Direct Assumed

718,395 1,068,200 1,247,683 1,471,202 1,703,781 2,001,220 2,164,293 2,154,078 2,201,167 2,338,569 1,620,174 bonds73%2,198,873 of 2,336,275 1,658,268 678,007 1,049,083 1,233,825 1,462,950 1,701,484 Foreign 1,998,926 2,161,999 2,151,784 40,388 19,117 13,858 8,252 incremental 2,297 2,294 external 2,294 2,294financing 2,294 2,294 -38,094 for public sector

Foreign Debt NG Direct NG Foreign Bonds Assumed

440,227 1,098,510 1,137,234 1,344,266 1,651,327 1,810,734 1,723,938 1,697,428 1,511,320 1,627,500 1,187,273 342,751 647,468 626,958 705,414 815,942 841,096 703,590 674,454 613,595 679,531 336,780 76,144 437,570 498,645 629,037 827,400 963,846 1,017,082 1,021,916 897,653 947,906 871,762 21,332 13,472 11,631 9,815 7,985 5,792 3,266 1,058 72 63 -21,269

Bonds/Foreign Debt Bonds/Debt

17.3% 1.8%

Source: Bureau of Treasury 29

39.8% 20.2%

43.8% 20.9%

46.8% 22.3%

50.1% 24.7%

53.2% 25.3%

59.0% 26.2%

60.2% 26.5%

59.4% 24.2%

58.2% 23.9%

73.4% 31.1%

NG Debt Service 1999-2008 (in Pm) 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008*

TOTAL DEBT SERVICE

205,396

227,843

274,439

357,959

469,990

601,672

678,951

854,374

614,069

610,300

Interest Payments Domestic Foreign

106,290 74,980 31,310

140,894 93,575 47,319

174,834 112,592 62,242

185,861 119,985 65,876

226,408 147,565 78,843

260,901 169,997 90,904

299,807 190,352 109,455

310,108 197,263 112,845

267,800 157,220 110,580

299,500

Principal Payments Domestic Foreign

99,106 61,552 37,554

86,949 45,429 41,520

99,605 54,038 45,567

172,098 80,944 91,154

243,582 147,322 96,260

340,771 222,405 118,366

379,144 253,492 125,652

544,266 380,939 163,327

346,269 284,017 62,252

310,800

6.90%

6.79%

7.56%

9.03%

10.89%

12.35%

12.47%

14.16%

9.24%

As % of GDP * Preliminary estimates

Source: Bureau of Treasury

External Debt 1990-2008 (in $m) YEAR

External Debt External Debt (end of period; in $m) to GDP Ratio

1990 28,322 1991 29,933 1992 30,771 1993 Less susceptible to global34,687 1994 37,351 interest spikes and less 1995 37,697 requirement for refinancing 1996 39,883 1997 for growth42,972 but little space 1998 46,146 1999 50,997 2000 51,206 2001 51,900 2002 53,645 2003 57,395 2004 54,846 2005 54,186 2006 53,367 2007 54,938 May-08 54,611 Note: 2007 & 2008 data are prelim inary

Source: Bangko Sentral ng Pilipinas

63.91% 65.91% 58.09% 63.80% 58.28% 50.86% 48.14% 52.19% 70.81% 66.96% 67.46% 72.88% 69.84% 72.07% 63.09% 54.83% 45.39% 38.13% 35.57%

NG debt reduced to 41% of GDP in 2010 % of GDP

Scope for counter cyclical deficit spending – if markets allow

32

NG Contingent Debt 1990-2008 YEAR

Domestic Foreign Debt (Pm) Debt (Pm)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

4,422 96,502 100,924 4,669 91,012 95,681 5,023 100,550 105,573 5,207 137,668 142,875 5,585 140,732 146,317 6,218 160,699 166,917 6,229 for 170,382 Scope counter 176,611 7,646 265,780 273,426 cyclical deficit spending 8,677 295,515 304,192 via GOCC, BOT 366,864 8,320 358,544 12,451 469,647 482,098 23,167 472,610 495,777 21,065 570,673 591,738 22,635 685,904 708,539 33,135 800,573 833,708 48,183 538,167 586,350 72,113 497,814 569,927 64,968 419,216 484,184

Source: Bureau of Treasury

TOTAL (Pm)

Total to GDP Ratio 9.37% 7.67% 7.81% 9.69% 8.64% 8.76% 8.13% 11.27% 11.41% 12.32% 14.37% 13.65% 14.93% 16.42% 17.11% 10.77% 9.45% 7.28%

NPL to Total Loans Ratio 20.00 18.00 16.00 14.00

July 2008 NPL ratio has dropped to 3.98%

12.00 10.00 8.00 6.00 4.00 2.00 0.00

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Mar- Jul-08 08 Source: BSP

Loans to Deposit Ratio of Philippine Banking System 100.0%

95.0%

90.0%

L/D ratio has increased slightly to 71% from 65%

85.0%

80.0%

75.0%

70.0%

65.0%

60.0% Ma Je Se De Ma Je Se De Ma Je Se De Ma Je Se De Ma Je Se De Ma Je Se De Ma Je Se De Ma Je Se De Ma Je Se De 1999

Source: BSP

2000

2001

2002

2003

2004

2005

2006

2007

Loans versus Deposits Loans now outpacing deposits 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0) (40.0)

TOTAL LOANS Source: BSP

M3

NPL

PHILIPPINE POLICY RESPONSES • Largely bracing for a US slowdown, not a global economic downturn cum financial meltdown • P75bn economic stimulus package approved by PGMA in Jan 2008, incremental spending for: – – – –

Social welfare for the poor Food production Tax relief for the middle class 1% NG deficit to GDP vs balanced budget

• With escalating deterioration, government must proportionally step up national effort

STRATEGIC FRAMEWORK 1. Real economy first. 2. Preemptive than reactive 3. If to assist financial economy, bias for the depositor, not the banker

PHILIPPINE STIMULUS PACKAGE 1 1. Rice self-sufficiency policy: DA budget augmented by P11bn in 2008 2. Cheap food strategy: NFA losses ballooned to P32bn from P8bn 3. Tax relief to middle class: minimum wage tax would increase take home pay by P36bn annually 4. Conditional cash transfer: budget increased form P298m to P5bn in 2008 and elevated as main tool for poverty reduction. 5. Katas ng VAT: various cash grants amounting to P7.5bn

STEPPING UP • Settle for modest economic growth from 6-8% to 3-4% – Needs less capital – Establish credibility – Reduce revenue program to more reasonable targets

• Prioritize the real economy: – Retain spending aggregates at P1.4trn – Keep NG deficit at 1.5% of GDP • Deficit-driven interest spikes could just be offset by adverse impact on private capital outlays

– redirect discretionary budget to human capital formation • From growth inducing infra to poverty-relieving social services

STEPPING UP • Recasting 2009 budget immediately doable response of the Philippines to the escalation in global crisis: – reduce revenue targets by P53bn

– redirect discretionary budget to human capital formation • From growth-inducing infrastructure (capital outlay) to poverty-relieving social programs (MOOE for social welfare) • From expansion of productive capacity (new construction) to productivity enhancing measures [rehab/maintenance] • More human capital formation (health and education) than physical capital formation. 

PHILIPPINE STIMULUS PACKAGE 2 1. CCT- Increase from P5bn to P15bn 2. Scholarship – Increase from P3bn to P15bn 3. Food production – 1. aggressive palay procurement by NFA- 10% of harvest, off-budget at P17bn, 2. retain P18.25/kg and do away with the access cards 3. JPEPA agri measures at P2bn

4. Universal Philhealth – Increase by P5bn to P17bn

CRITICAL MEASURES 1.

Secure access to external financial resources 1. 2. 3. 4. 5. 6. 7.

2.

$84bn per ASEM at Beijing US, EU, Japan to contribute to IMF US, EU, Japan to create trust fund with WB or ADB which may be accessed by developing economies Another Obuchi initiative led by Japan Maximize multilateral funding for ADB/WB- reflow of net repayments via new program/project loans eg WB interest to lend $400m for CCT Fortify JBIC pipeline Redevelop bilateral funding outside of JBIC

Strengthen financial sector 1. 2. 3. 4. 5.

Increase maximum deposit insurance coverage four-fold from P250T to P1M Inject new equity into PDIC (P10bn) with additional P30bn callable from NG Inspection power and bridge bank authority for PDIC Inject new equity into BSP (P40bn) via MYOA to contain impact on NG deficit Unified / integrated financial supervision –

Financial Services Authority

STEPPING UP • Settle for modest economic growth from 6-8% to 3-4% – Needs less capital – Establish credibility

• Prioritize the real economy: – Retain spending aggregates at P1.4trn but adjust revenue targets downward by P53bn – Keep NG deficit at 1.5% of GDP • Deficit-driven interest spikes could just be offset by adverse impact on private capital outlays

– redirect discretionary budget to human capital formation • From growth inducing infra to poverty-relieving social services

SCHOLARSHIP • Newest priority • Currently at P1bn at CHED and P2bn at TESDA • Increase by P12bn to P15bn – CHED to P11bn – TESDA to P4bn • 51% of unemployed between 15-24! Keep them in school – Expensive to create long term jobs PEZA/BOI at P2.5m/job – Capital getting scarce – Business prospects are not good, capital could be wasted

• College and techvoc training are public goods, i.e. socially desirable economic activity, and should be carriers of public subsidy – If they get jobs, it is a bonus

JOBS: July BLES INDICATOR

JUL 2005

JUL 2006

+ 1.3 million

JUL 2007

JUL 2008 p

Household Population 15 y.o. and Over (000) 54,583 55,475 56,857 58,119 Labor Force (000) 35,237 35,837 36,161 37,371 Employed (000) 32,522 32,926 33,318 34,597 Less than 40 Hours (part-time) (000) 11,887 11,722 11,062+ 1.2 million 11,694 40 hours and Over (full time) (000) 20,240 20,809 22,023 22,557 Fulltime as % of Total Employed 62.2% 63.2% 66.1% 65.2% Did not work during the Past Week (000) 394 428 233 346 Increase in population (1541.9 y.o. & over) Mean Weekly Hours Worked 41.3 42.6 42.5 is equal to6,660 labor force increase, 7,327 Underemployed (000) 7,718 7,275 therefore no increase in college enrollment Unemployed (000) 2,715 2,918 2,824 2,750 Labor Force Partcipation Rate (%) 64.6 64.6 63.6 64.3 Employment Rate (%) 92.3 91.9 92.2 92.6 Underemployment Rate (as % of Employed) 20.5 23.4 22.0 21.0 Unemployment Rate (%) 7.7 8.1 7.8 7.4 Note: Details may not add-up to totals due to rounding. p -- Preliminary Source : NSO and Labor Force Survey

Unemployment by Age Group: (as of October 2007)

10%

6%

3%1%

15-24 25-34 35-44

51% 29%

45-54 55-64 65 and over

Total Unemployed: 2,248,000

CHEAP AND ABUNDANT FOOD • DA budget already robust at P45bn plus P32bn losses at NFA • Additional P2bn for JPEPA measures to optimize market openings • Aggressive palay procurement- 10% of output at P17/kg needs P17bn increase in COB ceiling

CHEAP AND ABUNDANT FOOD • P32bn annual loss for NFA versus its normal annual loss of P8bn or an incremental loss of P24bn arising from the policy. – P8.5bn goes to farmers – P14.5bn goes to consumers.

• Initially, if added to the additional DA budget of P20bn (subsidy to producers), of which P10bn is for FIELDS, food production would the biggest intervention of the government in response to the global economic crisis at P44bn. • Differentially, this would mean an economic stimulus of P28.5bn to the rural and agricultural sector.  

UNIVERSAL PHILHEALTH • 2009 budget should be landmark for making Philhealth universal • Additional P5bn to make it universal coverage

RENEWABLES DEVELOPMENT: P5bn • RP targets 61% energy self-sufficiency by 2010 • Direct state expenditures for development of wind, solar, hydro and jatropha • Should complement the approval of the renewables law and implementation of the biofuels law • Possible concessional credit lines or guarantee system may be set up

REFORESTATION: P5bn • The country’s forests capture 120m MT of carbon versus its 148m MT emissions • To further mitigate, the national government should reinvigorate its reforestation program with a P5bn initiative in 2009

CLIMATE ADAPTATION • NG only has P2bn in the GAA for calamity fund versus P12bn by LGU’s at 5% of their IRA • RP is most vulnerable to the increasing climate impacts • Thus, the national budget for calamity fund should be increased to at least P10bn.

SUMMARY From Food Production Palay Procurement JPEPA Measure NFA subsidy DA budget Conditional Cash Trans Scholarship CHED TESDA Renewables Reforestation Calamity Fund Universal Philhealth BSP Addl Equity PDIC Addl Equity TOTAL

To 77 0 0 32 45 5 3 1 2 0 0 2 12 0 0

Intervention Impact Source 96 19 2 Realignment 17 17 NFA-CPSD 2 2 2 32 0 NFA-CPSD 45 0 15 10 10 Realignment 15 12 12 Realignment 11 10 4 2 5 5 5 Realignment 5 5 5 Realignment 10 8 8 Realignment 17 5 5 Realignment 40 40 Direct to debt stock 10 10 Direct to debt stock 114

47 Via realignment to keep deficit

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