Monday, May 17, 2010

The 2010 Philippine Economy after the 2008 Global Financial Crisis

Copyright © 2010 by Chester B Cabalza. All Rights Reserved.

One widely-cited example of contagion of economic crisis was the spread of the 2008-2009 Global Financial Crisis, which originated in the United States. However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is, instead, caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.

To note, the term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.

Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk.

In the recent global financial crisis, this eventuality brought repercussions to the slowdown in major western economies and adverse relative price movements. However, Japan as major Asian economy was hit except China and India. Other emerging powers in the ASEAN region were also affected such as Thailand, Singapore and Malaysia in that order except the Philippines which up to now is not heavily integrated to world economy.

Filipino economists deem that due to recent economic woes, price increases slowed due to slow economy but currently is now renewing uptrend; jobs fell behind in both quality and quantity (mostly in trade, repair services, household employment); and overall incomes barely grew from 0.9% GDP growth in 2009.

The Philippines key economic trends include the following: inflation in prices, job generation rebounds and unemployment rate up, incomes largely became stagnant, FDI flows appear to be recovering, favorable balance of payments, and net income inflows have “defied gravity”.

In my view since agriculture and manufacturing were down during the recession, the succeeding administration must look into expanding the growth in agriculture. To add, overall investments drop and government deficits balloons.

In terms of gross domestic income (GDP), the government consumption and construction were up high to 8.5% and 15.7%, respectively. Thus, Region X grew the fastest among all regions in the country.

The government spending likewise dominates growth that outsourced the fiscal stimulus for the country. The government can “pump prime” the economy by pouring its own money into the economy. It can also rely to “multiplier effect” of spending. Hence, multiplier effect is stronger when saving rate is lower and import content of the stimulated economic activities is lower.

But I think housing programs is the best stimulus coming from the government. In this way, labor intensive is premised by generating more jobs and money can circulate more among lower-income and lower-saving individuals; to lower import content that most other government projects are needed such when money stays in domestic economy and generates more tax revenues; lastly, it uplifts people’s lives and raises the poor man’s level of aspirations.

The question on whether or not the Filipino remittances are immune to crisis? The Overseas Filipino Workers (OFWs) are mostly in “recession-proof” sectors. They are favored by foreign employers over other nationalities. OFW deployments still rose 11% over the past year and fiscal stimulus packages in host countries open new jobs for them.

In terms of the implications of the recent economic trends on human development and poverty, the poverty rose from 30% to 35% now; thus, poor Filipinos up by nearly 4 million with average annual family income down from P148,000 in 2003 to P144,000 in 2006. Rates of enrollment in both elementary and secondary down and sad to say incidence of malnutrition are up.

Of the global outlook, the global economy is recovering; IMF projects 2.5% world economic growth in 2010; OECD economies end contraction; China and India continue brisk growth; world trade beginning to pick up; and worst of the global crisis appears to be over.

In the domestic level, the Philippine economy sustained remittance flows with $17 billion; lower inflation to boost consumption spending anew; and the assumption of election stimulus in 2010.

However, some threats and downers include the following: premature return of complacency in rich countries; weakness in governance through issues in graft and corruption, tax evasion, smuggling, and regulatory capture; political uncertainty by ways of failure of election scenario; and the heavy debt burden.

The Philippine economy is expected to grow by 2.6 to 3.6 by end of 2010 with pronouncements coming from ADB that the country will earn 3.3% GDP growth rate.

But with regards to the medium term outlook, it contains significant terms on inflation that is up tick expected as base effect base fades out from 3-4%; employment where job quality will be a continuing challenge; a gradual growth recovery of 2-3%; and the exchange rate holds mixed effects of weakening dollar, external threats, and domestic economy weaknesses.

I believe that the succeeding administration in government should consider the significance of agriculture, tourism, construction, real estate and property, mining and SMEs.

For instance, our country should gauge its strengths to replenish the coffers of its budget. I reiterate that the succeeding administration should focus his policies for the advancement and improvement of agriculture and tourism. Although GDP now is briskly improving with the huge contributions coming from these two sectors of agriculture and tourism – losing a momentum to support such thrusts is a lost for the country.

In the past years, tourism has been booming through the opening of budget airlines where emerging airlines around the region grabbed this opportunity to expand their business at the Subic-Clark economic zones, thus, SMEs were mushrooming in the area. However, because of the stiff competition from other international airlines, some of the local airlines made legal recourse to prevent major international airlines to operate in the country.

For the long term outlook, the Philippines should gauge its strengths because of its exceptionally rich and human resources and strategic geography through booming transshipment, shipbuilding repair, and tourism - favorable for global and regional trends. We must be resilient, adaptable people, in high demand worldwide, and aim for good governance.

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