Philippines: Statement of World Bank Senior Economist Eric Le Borgne at the launch of the East Asia Pacific Update
PHILIPPINES East Asia Pacific Update Launch
Statement by Eric Le Borgne World Bank Senior Economist
Pasig City, December 10, 2008
As described by Vikram and Ivailo from Tokyo, the perfect storm has hit the shores of all countries. What started as a localized and narrow financial crisis over a year ago—the US real estate market and the mortgage-backed securities that had fuelled that market—has now morphed into the most severe and widespread global financial crisis since the Great Depression; that once in a century storm is also turning what could have been localized economic slowdowns into a major global economic slowdown with most of the developed world already in or tumbling into recession; it is turning into a perfect storm where financial and economic turmoils are feeding on each other. Deleveraging across the world is causing capital to retreat from developing countries and the cost of financing to rise. This stress can only get worse as economic activity slows and the balance sheets of banks deteriorate further.
Now, in contrast to its geography which is often battered by rough weather, the Philippines’ financial system and economy have been fortunate in not taking a direct hit from this perfect storm. While domestic financial markets have no doubt been affected, the Philippines has fared better than other countries in the region and the impact so far of this shock has been manageable—e.g., stock market, exchange rate; the banking system had limited direct exposure to toxic assets (though it is indirectly affected through the decreased prices of sovereign paper holdings).
Of course, the country’s resilience is no accident: it is mostly due to the robust buffers deliberately built since the East Asian crisis. Key among these is the fiscal consolidation effort which significantly reduces underlying macroeconomic vulnerabilities. Large remittance inflows have also generated current account surpluses and helped in the build up of foreign exchange reserves; for the first time in a generation, the Philippines is entering an economic slowdown from a current account surplus position and with large foreign exchange reserves. In the financial sector, a stable macroeconomic environment, reforms and prudential regulations undertaken since the East Asian crisis, and a reliance on stable financing sources (deposits) have significantly improved the resilience of the banking industry.
Nonetheless, the global slowdown is already impacting economic activity and halting the prolonged period of high GDP growth rates. Real GDP growth slowed to 4.6 percent in the first nine months of 2008, and is now projected at 4.3 for the year, down from 7.2 percent in 2007. Third quarter GDP data reveal that some of the underlying sources of growth might not be sustainable over the next quarters (e.g., residential construction). For 2009, we are projecting that even with counter-cyclical fiscal policies, growth could slow to 3 percent.
What this means concretely is, what until recently for most Filipinos were remote and abstract news reports (“financial crisis”, “global slowdown”) could soon become all too real. Employment prospects 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 has already been made difficult in 2008 following the surge in food and commodity prices which disproportionately affected the poor.
More than ever, sound policy making will be crucial for the country to weather the storm with the least possible damage:
• The BSP needs to continue its fine balancing act between macroeconomic and financial stability. After years of low single-digit inflation, the food-and- fuel-prices driven inflation surge of 2008 prompted the BSP to increase interest rates during June-August. However, as the global financial crisis hit home, the BSP skillfully availed itself of the variety of policy instruments at its disposal and introduced timely and, at times, innovative measures to protect both financial and price stability. Notwithstanding high and still rising core inflation, inflation is expected to ease back in 2009, which will benefit the poor.
• Appropriately, the government is using fiscal policy to soften the impact of the perfect storm on the economy and its most vulnerable members. Early in 2008, with the country hit by high food and commodity prices, the government expanded its fiscal deficit to accommodate additional spending to protect its most vulnerable citizens. As the crisis evolved and the domestic impact of the perfect storm is affecting the real economy, the government is further postponing its fiscal balance plans and aims to stimulate the economy further through increased infrastructure and social services spending, such as the conditional cash transfer program (which we strongly support and could be expanded to help mitigate the worst effects of the slowdown).
• However, heightened global risk aversion requires the government to remain firmly in control of fiscal expansion plans to allay sustainability concerns. Let me reiterate that, thanks to previous fiscal consolidation and reform efforts, the Philippine is in the enviable position of being able 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. What we mean is that, alongside its desirable extra spending on infrastructure and targeted social safety nets, the government needs to have revenues firmly under control. The recent weakness in tax collection and the more challenging environment for such collection projected for 2009 call for decisive and significant tax policy and administration reforms. We fully support the DoF policy and reform plans in this area.
To conclude, I would like to reiterate the three key messages I just conveyed to you:
First, what was an abstract and remote financial crisis has morphed into a global economic slowdown and is slowly becoming a concrete problem affecting the livelihood of many Filipinos through job losses, underemployment and reduced remittances.
Second, this crisis presents a substantial risk for the poor. The poor, first battered by high prices of food and fuel, and now facing the prospect of high unemployment, underemployment and potentially lower remittances will find it even harder to escape poverty during the global economic slowdown.
Third, policy tools are available and are being used, but selectivity and priorities are necessary. This is especially the case in the fiscal area: an appropriate fiscal loosening is taking place through a boost in infrastructure programs (MT competitiveness) and the expansion of targeted social safety nets (such as the CCT that help preserve human capital of the poor) but revenues need to be firmly under control.
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