Brace for the Economic Storm in 2009

Published on January 10, 2009

It also remains possible that the local economic slowdown will find domestic firms and households unable to service their debts. Bank failures are a strong possibility especially among smaller banks but perhaps even among bigger ones. The tightening of domestic and international credit will exert a powerful depressing influence on local economic activity. The greater risk of cascading problems amidst greater financial liberalization cannot be underestimated and the current crisis will test how grounded the domestic financial sector is to the real economy.

The government’s unresolved fiscal crisis is on the verge of intensifying again. The prospect is of higher taxes and even more shrunken social services as the government deals with its fiscal plight according to distorted priorities.

As it is total revenue growth of 8.5 percent in the first ten months of 2008, despite RVAT, has not even kept pace with the 14.2 percent nominal year-on-year growth in gross national product (GNP) in the first three quarters of 2008. Yet the economic crunch will further undermine revenue collection, aggravated by the lowering of corporate income taxes next year, even as “emerging market” premiums and a depreciating peso drive up debt service expenses. The quick-fix measure of privatization is also becoming less and less effective. The administration hardly has any assets left to sell following the privatization frenzy last year, which was the most extensive in the country’s history.

External financing for the country is dropping steeply. The US$912 million net outflow of foreign portfolio investments in the January-October 2008 period is a drastic reversal from the US$3.7 billion inflow in the same period last year. Net FDI is going in the same direction and fell by more than half to US$1.1 billion in January-August 2008 from US$2.5 billion in the same period in 2007. There is also a strong possibility that the rate at which official development assistance (ODA) is declining will worsen in the coming years as donor governments prioritize domestic financing needs. As it is ODA has already fallen 30 percent to US$9.2 billion last year from US$13.2 billion in 2001.

Various factors will come into fuller play by next year and action must be taken as soon as possible. The country faces greater joblessness, lower incomes, increased poverty, fiscal troubles and heightened instability. However the government’s response to the crisis where it insists on asserting imaginary “sound fundamentals” is tantamount to gross neglect and will do little to lift the economy or address the plight of the people.

There are two stages in coping with the crisis. The first stage is to arrest the slowdown in economic activity and the corresponding worsening in unemployment, incomes and poverty. This is critical especially since the country has already been suffering record unemployment, falling incomes and rising poverty in the last few years.

The second stage involves a radical change in socioeconomic policies. This much is clear from the Philippine’s poor development experience and chronic poverty over the last six decades: the stubbornly elite-biased and increasingly “free market”-oriented policies are a development dead-end. The welfare of tens of millions of Filipinos will not improve given current trends of deteriorating manufacturing, backward agriculture, poor savings and investment rates (i.e., capital accumulation), failing public education and health services, falling incomes and rising poverty. The need to go back to basics is more urgent than ever: true agrarian and national industrialization.

1. Data from United Nations Conference on Trade and Development (UNCTAD) World Investment Report (WIR) 2008
2. Data from Board of Investments (BOI) and National Statistical Coordination Board (NSCB)
3. Data from NSCB
4. IBON computations on data from FAOSTAT and NSCB
5. Data from Family Income and Expenditure Survey (FIES) 2006 of National Statistics Office (NSO)
6. Data for 2007 approximates unemployment using old definition and is estimated by IBON using quarterly Labor Force Survey of NSO.
7. Data from Bureau of Export Trade Promotion (BETP)
8. Data from BETP
9. Data from Banko Sentral ng Pilipinas (BSP) Information and Communications Technology (ICT) Survey 2005
10. Data from BSP
11. United States (US) Census data cited in “Social and Economic Overview of Filipinos in the United States”, NAFCON Community Education Center, 2007.
12. IBON computations on data from Bureau of the Treasury (BTr) and NSCB.
13. Investment data from BSP

Pages: 1 2 3