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The Philippines: resilience from a low base

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  • Josef Yap

    Philippine Institute for Development Studies

In Brief

The Philippine economy slowed down sharply in 2008. GDP growth in the first three quarters of 2008 fell to 4.6 per cent, compared to 7.5 per cent in the same period a year ago. The jump in the inflation rate following a sharp rise in food and fuel prices was the first big setback. Inflation averaged 9.4 per cent in the first 11 months of 2008 after recording only 2.8 per cent in 2007.

Another factor was the sharp deceleration in construction activity following a surge related to the 2007 elections and the initial implementation of President Macapagal-Arroyo’s ambitious infrastructure program. The US recession, which officially began in December 2007, was alsao a likely contributor to the slowdown.

The economy seems continue to slow further following the chaos in the global financial system and the recession in major economies including Germany, Japan, Singapore and Hong Kong that has followed. Key multilateral agencies are unanimous in the view that the Philippines will see lower economic growth in 2009.  The IMF, the World Bank and the ADB all forecast growth around 3 per cent, or at most 3.5 per cent. Growth in 2008 is estimated at 4 per cent or a touch over. In 2007 it was well over 7 per cent.


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The major reasons for pessimism are the likely lower growth in personal consumption expenditure largely due to a slowdown in overseas remittances; sluggish investment owing to the uncertain economic environment; and a drop in export growth rate due to a fall in global demand. The economies in East Asia are likely to continue to be affected by the aftershocks of the global financial crisis.  The virtual freeze in liquidity in US and European financial markets has stopped and, in many cases, reversed capital flows to emerging and developing countries.

The immediate impact of the liquidity squeeze in international capital markets was a rise in the price of risk—as measured by bond spreads—a sharp drop in equity prices, and exchange rate volatility. The foreign currency government bond spread for the Philippines jumped from 155 basis points in June 2007 to 549 basis points in November 2008. The main index of the Philippine stock market fell by 45 per cent between December 2007 and November 2008. The exchange rate was also volatile, with the peso depreciating by 16.6 per cent between March 1, 2008 and November 30, 2008 after appreciating by 39 per cent against the US dollar between September 20, 2005 and February 29, 2008.

These developments are unlikely to have a lasting impact on the real sector. Rather, the Philippine economy may actually be spared the brunt of the fallout from the global financial crisis. Like many economies in East Asia, the Philippine financial sector has avoided serious damage. The relative resilience of regional banking and financial systems in East Asia reflects a number of factors, including: 1) the very limited direct exposure of the region to subprime and other related securitized products; 2) relatively strong bank balance sheets with a return to profitability—as impaired loans from the 1997/98 Asian financial crisis have been worked off; 3) improvements in risk and liquidity management; 4) strengthening of supervisory and regulatory systems; and 5) moves by banks into new and profitable domestic business lines such as consumer lending. The move into consumer lending implies an absence of the strong search for yield that led many banks and other financial institutions in industrialized countries to take on too much leverage and risk.

Ironically, the resilience of the Philippine economy is due to factors that limited its growth during the past 3-4 decades. The synchronized economic recession among major global economies will clearly lead to lower exports and foreign direct investment. Philippine exports, however, have relatively low value added in terms of contribution to GDP. FDI has not played the same critical role as it did in Malaysia, Thailand, Indonesia, China and Vietnam. Meanwhile, domestic private investment has been moribund during the past 10 years and there is little room for further deterioration. Remittances are still expected to grow between 6 to 10 per cent in 2009 and this remains a substantial source of growth since remittances are equivalent to 10 per cent of GDP. The improved inflationary picture should also help cushion the economic slowdown.

Another favorable development is that unemployment rate in 2008 rose only slightly to 6.8 per cent in 2008 from 6.3 per cent in 2007. This is also much lower than the unemployment rate over the past 20 years. The performance in the fourth quarter of 2008 will provide a clue as to the trajectory of the economy in 2009. A fourth quarter GDP growth above 4.5 per cent will augur well for a higher than forecast 2009 GDP growth, closer to 4 than 3 per cent. This outcome should hardly be a cause for satisfaction on the part of policymakers. The Philippines has one of the worst records in terms of poverty alleviation in East Asia, importantly it has not yet broken out of its low-equilibrium growth trap.

Josef Yap is President of the Philippine Institute for Development Studies (PIDS) and is one of the Philippine’s most prominant economists. Dr. Yap has acted as a member of the Committee on Social and Human Sciences to the UNESCO National Commission of the Philippines.

This is part of the special feature: Reflections on developments in Asia in 2008 and the year ahead

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