benjamin e. diokno, ph.d

Benjamin E. Diokno, Ph.D.

Philippine economic prospects, the 2010 elections and implications on the banking sector

Good News, Bad News The good news is that the

synchronized and coordinated monetary easing and fiscal stimulus programs worked. Confidence rebounded strongly on both the financial and real fronts, as extraordinary policy support forestalled another Great Depression.

2008 2009 2010 2011

Advanced economies

0.5 -3.2 2.1 2.4

United States 0.4 -2.5 2.7 2.4

Euro area 0.6 -3.9 1.0 1.6

Japan -1.2 -5.3 1.7 2.2

Newly industrialized Asian economies

1.7 -1.3 3.3 3.6

ASEAN-5 4.7 1.3 4.7 5.3

Diokno I Economic Briefing 112009

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Good News, Bad News Most economies are starting to recover. But recovery is

proceeding at different speeds. There is also the risk of a fullback in growth in 2011 …as the positive effect of this stimulus fades against a background of continued fragile corporate and household sentiment.

One thing is sure: global growth is unlikely to return to the trend rate of recent years until perhaps after a few years.

Achieving sustained robust growth over the medium term will depend critically on addressing the supply disruptions generated by the crisis and rebalancing the global pattern of growth.

Continued policy efforts are needed to sustain the recovery and prepare for exit.


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How will the global economy rebalance?IMF, WEO, October 2009

On the supply side, financial firms will need to be restructured and markets repaired to deliver adequate credit for sustained increases in investment and productivity. And labor will need to be redeployed across sectors.

On the demand side, rebalancing depends on switching from public to private demand and from domestically to externally driven growth in many economies that experienced asset price busts.

By implication, economies that previously relied on export-led growth will need to switch from externally to domestically driven growth.


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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 2009, the industrial sector contracted by 2.0%.


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The economy has suffered a savage fall


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Agriculture, fishery and forestry

Ave0307 2009

Agr, fishery, forestry 4.01 0.1

(Share to GDP) 19.14

Agriculture, fishery 3.95 -0.7


Forestry 17.95 -1.1

(Share to GDP) 0.10

Agricultural output was stuck at zero growth in 2009 -- compared to an average growth rate of 4.01% during the most recent peak (2003 -2007).

The agricultural sector accounts for 19.4% of GDP


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Industrial sectorAve0307 2009

Industry 4.88 -2.0


Mining, quarrying 9.54 21.0

(Share to GDP) 1.62

Manufacturing 4.66 -5.1


Construction 5.06 5.8

(Share to GDP) 4.70

Electricity, gas, water 4.70 -2.8

(Share to GDP) 3.16

The industrial sector contracted by 2.0% in 2009, a sharp drop from its robust growth of 4.9% from 2003 to 2007.

Manufacturing was the biggest loser, contracting by negative 5.1% from an average growth of 4.7% during its recent peak. That’s a swing of about 10%. Even the utilities sector has contracted.

On the bright side, construction grew by 5.8% in 2009 owing to faster public construction; however, private construction contracted during the same period.


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Services sectorAve0307 2009Services Sector 7.21 3.2


Trans, comm, storage 8.35 1.8

(Share to GDP) 8.55

Trade (wholesale,retail) 6.80 2.0


Finance 10.60 7.1

(Share to GDP) 5.32

Ownership of 5.29 -1.0

dwellings, real estate 4.66

Private services 8.39 3.8

(Share to GDP) 8.22

Gov’t services 2.83 5.0

(Share of GDP) 4.40

The services sector slowed significantly to 3.2% growth in 2009 – significantly less than 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 weak consumer demand.


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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 2009 was across-the-board


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Challenges for the next administration

Low investment rate, particular low foreign direct investment

Unemployment: large and rising joblessness

Poverty owing to slow, non-inclusive growth and fast-growing population

Severe budget constraint—the next administration will be faced with narrowing fiscal space


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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 FDIs mean lower long-term growth and thus, lower employment.


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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.


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Year/Survey Unemployed in thousand

Underemply in thousand

Unemploymt rate (%)

Underemploy rate (%)

Jan 2009 2,855 6,238 7.7 18.2

April 2009 2,830 6,622 7.5 18.9

July 2009 2,922 7,034 7.6 19.8

2008 (Aver) 2,716 6,574 7.4 19.3January 2,675 6,368 7.4 18.9

April 2,914 6,625 8.0 19.8

July 2,750 7,275 7.4 21.0

October 2,525 6,028 6.8 17.5

2007(Aver) 2,653 6,757 7.3 20.1January 2,850 7,214 7.8 21.5

April 2,692 6,378 7.4 21.5

July 2,824 7,327 7.8 22.0Diokno I Economic Briefing 102709

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It’s unemployment, stupid

Unemployment-hunger linkWith weak social protection, hunger incidence deepens as unemployment rises


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Poverty outlook is grimPoverty incidence will get worse before it gets better


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But let’s talk of warm bodiesWhy poverty has worsened in 2009?

Food and fuel prices rose sharply in 2008

The economy slowed as the world economy contracted –thus unemployment worsened. Job prospects remain gloomy in the face of weak and fragile recovery.

Population continues to grow - the less educated poor outgrowing the educated rich.

What should the government do?

Continue the fiscal stimulus by increasing spending in essential, shovel-ready infrastructure, education, health and agriculture

Restore consumer and investor confidence


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But the government’s ability to increase spending will be constrained by weak public finances

Tax-to-GDP ratio is falling

Budget deficit is ballooning

National government debt is soaring


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Weaker, low-yielding tax systemTax-to-GDP ratio risks reverting to low levels seen during the Marcos final years


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Fiscal House in DisarrayGMA run large deficits from 2001-04; huge deficits have reemerged in recent years

Fis


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High and Rising Public DebtAs the world economy recovers, interest rates would rise, leading to higher debt service


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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?


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Near and medium-term macroeconomic outlook

Author’s forecast, March 2010Particulars 2007 2008 2009 2010 2011 2012

Real GDP growth,% 7.1 3.8 0.9* 2.8 3.2 3.4

Inflation Rate, CPI 2.8 9.3 3.2 4.5 4.0 4.5

FOREX(P/US$) 46.15 44.47 47.00 46-48 46-48 46-48

Budget deficit/GDP -0.2 -0.9 -3.8 -4.0 -2.5 -2.0

Population, million 88.7 90.5 92.2 94.0 95.9 97.8

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 continue to weaken and should the Philippine government continue to borrow from abroad to finance its budget deficits.

Balancing the national government budget by 2013 is ill-advised. A gradualist cut in the deficit is recommended to avoid a W-shaped recovery.


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We’re at a crossroads once more

The next President will face daunting challenges. But a ‘good’ elections, followed by a smooth transfer of powers, could result in renewed confidence in our political system.

What qualities are we looking for in the next President?

Strong leadership and willingness to undertake bold reforms, such as, first, fundamental tax reform (shift from income-based to consumption based taxation), second, more focused public spending program, and third, changing the way the government operates by embracing transparency and accountability in the use of public funds.

Excellent communicator. The next administration’s economic recovery program will involve a lot of pain. This program has to be communicated well to all Filipinos -- especially the poor and powerless.


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Litmus test for the next President

What’s the presidential candidate’s position on the following issues? Higher value added tax, lower personal and corporate income

tax Higher spending for social services such as conditional cash

transfer and universal basic health care Cutting pork barrel (P75 million per congressman, P200 million

per senator) Declaring the existence of a budget crisis and cut Internal

Revenue Allotment by one-fourth Program for population management

Dilemma: what’s the likelihood that the presidential candidate will do what he promised if elected?


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What the country needs now? An honest, orderly and peaceful election

(HOPE). Elections should not be seen as a source of economic growth. Rather it should be seen as a source of pride by a free and democratic people. Every credible and peaceful election is a building block for a strong democracy. But perhaps the only time we’ve had a credible presidential election under the newly restored democracy was in 1998 when Estrada was elected – and then he was removed unconstitutionally.

The important question is: Can we afford to have another failed election?


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Thank you!

Benjamin E. Diokno, Ph.D.School of Economics, U. of the Philippines

[email protected]


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benjamin e. diokno, ph.d

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