MANILA, DECEMBER 10, 2008—Policy makers in the Philippines and the rest of the East Asia and Pacific (EAP) Region need to see the financial crisis as an opportunity to establish or strengthen well-targeted social safety nets to protect the poor as well as boost domestic demand, thus enhancing the Philippines’ and the region’s chances of weathering the global storm. This is one of the key findings of the East Asia and Pacific Update, the latest half-yearly assessment of the region’s economic health, launched today by the World Bank via video conference from Tokyo.
The report says that the region, including the Philippines, entered the current crisis substantially better prepared than they were for the 1997 Asian financial crisis. However, none will be spared the fury of the global economic storm. It added that the Philippine economy will grow by only 4 percent this year and 3 percent in 2009 after posting a three-decade high of 7.2 percent in 2007. Weakening exports and reduced levels of investment and consumption will constrain developing East Asia to an overall 8.5 percent growth rate in 2008 and 6.7 percent in 2009.
Developing East Asia includes China, Indonesia, the Philippines, Thailand, Vietnam, Cambodia, Lao PDR, Mongolia, Papua New Guinea and the island economies of the Pacific.
The report expects the Philippine economy to remain resilient and stresses that the direct impact on the Philippine banking system from the turmoil has been marginal. Overall exposure to structured products is estimated at about 2 percent of banking assets.
Mr. Eric Le Borgne, World Bank’s senior economist for the Philippines, nevertheless stressed the need for the country to protect the sustainability of its fiscal sector to allow for better and more capital and social expenditure and ensure that monetary policy is appropriate to control inflationary pressures that impact more heavily on the poor.
He explained: “Thanks to previous fiscal consolidation and reform efforts, the Philippines is in a good position to undertake countercyclical fiscal policies. However, the markets’ continuously shifting assessment of how the country can finance its higher overall fiscal deficit and its maturing obligations implies a significant premium in having a fully controlled fiscal expansion. Alongside its extra spending on infrastructure and targeted social safety nets, the government needs to have revenues firmly under control.”
While the Philippines has not taken a direct hit from the global financial turmoil, he said that news reports about the global slowdown could soon become all too real. Employment prospects—he noted—are tightening, unemployment and underemployment could rise significantly and the strong flow of remittances will likely be more challenging to sustain. “These could have profound distributional impact for most Filipinos and will likely provide strong headwind in the fight to reduce poverty. This fight was already difficult in 2008 following the surge in food and commodity prices which disproportionately affected the poor.”
Mr. Bert Hofman, World Bank Country Director for the Philippines commended the government, particularly the Department of Social Welfare and Development (DSWD), for its efforts to put in place a well-targeted social safety net like the conditional cash transfer (CCT), a program that provides modest food, health and educational subsidies to the poorest of the poor in return for sending their children to school, attending health centers, and having regular prenatal and postnatal care for mothers. “It’s one of the best ways to help the poor cope with the current crisis,” said Mr. Hofman.
The program, he said, could also become the foundation for a modern social protection system in the Philippines, stressing that a good targeting system could be complex to develop, but it can be used for many other social programs, not only for direct transfers like the CCT, but also for health care, education, housing, utilities, among many others.
“In countries contemplating or implementing stimulus packages, measures supporting the most vulnerable will be part of the measures intended to boost domestic demand,” says the East Asia & Pacific Update. “Different kinds of cash transfer programs have been used in China and Indonesia and several countries in the region have some social safety net in place that could be used to transfer resources to the poor.”
Overall, the report notes that the downside risks to East Asia are substantial in the near term but adds that countries will be better positioned to deal with the crisis if they are able to maintain macroeconomic stability, shift exports to faster growing regions in the world, substitute external with domestic demand, and continue with structural reforms to strengthen competitiveness.
“Despite the difficult road ahead, those countries that sustain the sound policies pursued thus far and tackle new challenges decisively will be the ones to emerge in a strengthened position when the global economy begins to recover,” said Mr. Vikram Nehru, the World Bank’s Chief Economist for East Asia and the Pacific.
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