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Benjamin E. Diokno, Ph.D.

The World Economic Crisis: Its Impact on the Philippine Economy. Benjamin E. Diokno, Ph.D. Subdued Medium-Term Outlook Economist Intelligence Unit global economic forecast, September 10 th 2009.

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Benjamin E. Diokno, Ph.D.

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  1. The World Economic Crisis: Its Impact on the Philippine Economy Benjamin E. Diokno, Ph.D.

  2. Subdued Medium-Term OutlookEconomist 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

  6. 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%. Diokno I Economic Briefing 102709

  7. Economic growth has slowed sharply Diokno I Economic Briefing 102709

  8. Agriculture, fishery and forestry • 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

  9. Industrial sector • 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. Diokno I Economic Briefing 102709

  10. 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. Diokno I Economic Briefing 102709

  11. Aggregate demand slowed in 2008 and 2009 The economy is consumer-driven; capital formation is low and falling Personal consumption plummets, capital formation dives, public construction contracts by 4.4%. The slowdown in 2008 and H1 2009 was across-the-board Diokno I Economic Briefing 102709

  12. Shrinking MarketConsumers remain unsure of the future Diokno I Economic Briefing 102709

  13. Business sentiment dropped sharply, but recoveringBSP Business Expectations Survey, Third Quarter 2009 Diokno I Economic Briefing 102709

  14. 2009 GDP ForecastsEmerging consensus is that the Philippine economy will barely grow by 0.4% Diokno I Economic Briefing 102709

  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

  16. 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? Diokno I Economic Briefing 102709

  17. Export Performance, by CountryDecoupling theory has been disproved; recession is synchonized Diokno I Economic Briefing 102709

  18. The Philippines’ export markets are contracting Diokno I Economic Briefing 102709

  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. Diokno I Economic Briefing 102709

  20. Foreign direct investments down sharply FDIs were low by international standard; hit rock-bottom in 2001 Among ASEAN-5 economies, the Philippines received the lowest FDIs. Lower FDI means lower long-term growth and thus, lower employment. Diokno I Economic Briefing 102709

  21. State of Unemployment • It’s unemployment, stupid: the focus of government intervention should be on job creation and job preservation. • Even before the world 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. Diokno I Economic Briefing 102709

  22. It’s unemployment, stupid Diokno I Economic Briefing 102709

  23. Unemployment-hunger linkWith weak social protection, hunger incidence deepens as unemployment rises Diokno I Economic Briefing 102709

  24. Macroeconomic OutlookAuthor’s forecast, October 2009 • 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 systemTax-to-GDP ratio risks reverting to low levels seen during the Marcos final years Diokno I Economic Briefing 102709

  28. Fiscal House in DisarrayGMA run large deficits from 2001-04; huge deficits have reemerged in recent yearsFis Diokno I Economic Briefing 102709

  29. High and Rising Public DebtAs the world economy recovers, interest rates would rise, leading to higher debt service Diokno I Economic Briefing 102709

  30. 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 But what if the next administration needs a second fiscal stimulus program? Diokno I Economic Briefing 102709

  31. Impact of the Great Flood and Pepeng • Short- and medium-term • Massive loss in agricultural output (in Central and 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.) Diokno I Economic Briefing 102709

  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 -bediokno@gmail.com Diokno I Economic Briefing 102709

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