PHILIPPINES: Statement of World Bank Senior Economist Eric le Borgne at the Launch of the East Asia and Pacific Half-Yearly Update
PHILIPPINES Launch of the EAP Half Yearly Economic Update "Battling the Forces of Global Recession"
Statement by Eric LE BORGNE, Senior Economist, World Bank Office in Manila
Pasig City, April 7, 2009
Overview
As with the rest of developing East Asia, the Philippines is battling the forces of global recession. Notwithstanding its relatively good economic and financial fundamentals prior to the onset of the global financial crisis, the crisis in the advanced countries is rapidly being transmitted to the Philippines. While the country was relatively sheltered from the initial global financial turbulence, it was nonetheless affected. Now, with aggregate global demand falling precipitously, sharp declines in exports and industrial production are triggering factory closures, impacting labor markets and poverty. The authorities have been prompt in recognizing the impact on its most vulnerable citizens and scaled up social programs and conditional cash transfers. They have also responded quickly with expansionary monetary and fiscal policies. However, given the projected output gap, these measures will only mitigate, not overcome, the contraction in private sector activity.
As the global financial crisis evolved into a global recession, its transmission from the rest of the world to the Philippines is gaining strength. The Philippines withstood the global financial crisis well as it was better prepared for this shock after the 1997-98 Asian financial crisis. Since then, the country has strengthened its external balances, increased foreign exchange reserves, reduced government debt, and improved banking supervision and regulation. Large and stable remittance flows and the banking system’s reliance on stable financing sources have been particularly important in buffering the economy from the current global financial crisis. However, a sudden and sharp contraction in consumption, production, and investment in the rest of the world is already taking its toll on export-oriented sectors and is expected to spread to the rest of the economy over time. Accordingly, projected real GDP growth for 2009 has now been revised to 1.9 percent and prospects for a strong rebound in 2010 have also diminished. Although the risks to our projections are tilted to the downside, the economy contains significant buffers to avoid a recession (Table).
As the global economic environment worsens, the following three factors will be key to the success of the Philippines in its battle against the forces of global recession:
Continued policy measures to buffer the impact of the global recession and position the country for the recovery.
o The Bangko Sentral ng Pilipinas (BSP) has been prompt and forceful in addressing both economic and financial system risks. The series of regulatory and prudential measures introduced since September have supplemented existing measures to ensure adequate liquidity in the financial system and reduce stress points. The rapid easing of central bank rates, as inflationary pressures eased, also helped both the real economy and the banking system.
o On the fiscal front, the government has also taken significant measures to protect economic growth and its most vulnerable citizens. Key among these measures are: (1) postponing the medium-term balanced budget goal to 2011; and (2) introducing an Economic Resiliency Plan (ERP). Despite the ambitious size of the ERP (4.1 percent of GDP), the actual impact of the plan in 2009 would be constrained by the following factors:
A large share of the actual fiscal easing for 2009 stems from the revenue side (which has a lower fiscal multiplier) while the expenditure component (such as the boost in capital spending) would mostly occur in outer years.
The recently observed deterioration in the tax-to-GDP ratio is projected to accelerate—barring the introduction of significant new policy and/or administrative measures—and could undermine the credibility of fiscal policy. While the 2009 NG budget envisages an overall deficit of 2.8 percent of GDP (GFS basis), revenue shortfalls projected by the World bank would either (1) require compression in discretionary spending in the second half of 2009 to maintain the deficit target; or (2) increase the deficit to a point where it could affect confidence in the medium-term fiscal framework.
Implementation of these policy measures and plans amid a worsening economic outlook therefore call for frequent reassessment of their impact. In the fiscal area, ensuring a controlled fiscal easing is critical to achieving a positive impact on the economy.
Sustained remittances inflows. Remittances underpin much of the resilience of the economy. At about 10 percent of GDP, they have been a fairly stable source of income for consumers, foreign exchange, savings, and deposits. Previous slowdowns have shown remittances to be counter-cyclical in the Philippines but the global nature and scope of the global recession will diminish this stabilizing effect. The sharp fall (25 percent year on year in US dollar terms) in remittance flows from the USA in both December and January testify to the risks involved.
Strength of the labor market. With a comparatively high population growth rate, the Philippines has in the past relied on high domestic economic growth and labor export to absorb its work force. Both sources of labor absorption are now under pressure and are expected to worsen further, probably well into 2010. Measures undertaken by the government to assist workers made redundant (especially in the export sectors) and returning OFWs are welcome in this regard.
Along with fiscal programs, developments in remittances and the labor market will be crucial to the fight against poverty.
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