Economic Crisis and Response in the Philippines

The Global Economic Crisis pulled countries down from around the globe to a recession. Wide-ranging declines in many aspects of growth characterize the overall impact it had had on the global scale. Following the Asian economic crisis in 1997, the present global economic crisis imposes new challenges to the Philippines as a developing country. Following are expositions of the macroeconomic impacts of the crisis in the Philippine setting, its implications in the prevalent poverty scenario, and policies and programs undertaken by the government in response to the crisis.

Overview of the Global Economic Crisis

The 2008 global economic crisis started upon the bursting of the United States housing bubble, which was followed by bankruptcies, bailouts, foreclosures, and takeovers of financial institutions and national governments. During a period of housing and credit booms, banks encouraged lending to home owners by a considerably high amount without appropriate level of transparency and financial supervision. As interest rates rose in mid-2007, housing prices dropped extensively, and all institutions that borrowed and invested found themselves suffering significant losses. Financial institutions, insurance companies, and investment houses declared either declared bankruptcies or had to be rescued financially. Economies worldwide slowed during this period and entered to a recession.

The crisis, initially financial in nature, has now taken a full-blown economic and global scale affecting every country to the left and to the right of the United States, and wreaking havoc in the level of both industrialized and developing nations.

The Philippine Situation before the Crisis

The Philippines has long been undermined with long-term structural problems such that sustainable economic development is yet to be a dream come true. According to the pages of Philippine economic history, the country has been dominated by a sequence of growth spurts, brief and mediocre, followed by shard to very-sharp, severe, and extended downturns—a cycle that came to be known as the boom-bust cycle. As such, economic growth record of the country has been disappointing in comparison with its East Asian counterparts in terms of per capita GDP. What makes matters worse is the seemingly perennial impoverished state of its inhabitants, that is, in 2007, an absolute poverty incidence of 13.2 percent—higher than Indonesia’s 7.7 and Vietnam’s 8.4 percent—has been recorded, and thus giving further testimony of the unequal distribution of wealth that keeps growth and development a far reach for the Philippines.

Macroeconomic Impacts of the Crisis

The Philippines, points Professor Diokno of the University of the Philippines, has been affected by the crisis in a decline in three aspects: exports, remittances from overseas Filipino workers, and foreign direct investments. Heavily dependent on electronic and semiconductor exports, the Philippines has seen a downward trend in its export earnings as countries in demand of these exports are now in recession. The recession has also put to risk the jobs in the developed countries which include those where migrant workers are employed. Consequently, OFW remittances decreased and grew a meagre 3.3% in October 2008. Foreign direct investments (FDI) lowered because of investors losing confidence in the financial market. Lower FDIs mean slower economic growth.

Impacts of Asset Markets, Financial Sector, and Real Sector

The freeze in liquidity in US and European financial markets reversed capital flows to developing countries and induced a rise in the price of risk which entailed a drop in equity prices and exchange rate volatility. However, following the effects of an increase in the foreign currency government bond spread, the Philippine stock market was actually one of the least affected by the crisis with the main index of the stock market dropping only by 24 percent, a relatively low percentage change in comparison to those of other countries across Asia. Similarly, from the period between July 2008 and January 2009, the peso devaluated only by 3 percent which explains why the peso was one of the currencies least affected by the crisis. This minimal effect on the stock market and the Philippine peso can be attributed to the recovery of asset prices across the Asia-Pacific region recovered in early 2009 as foreign portfolio investments surged.

Financially, the banking system in the Philippines has been relatively stable, because of reforms that were put in place since Asian financial crisis in 1997. Maintenance of high levels of loan to deposit ratios together with the decline of the ratio of nonperforming loans to total loans kept profitability of local banking generally high despite the crisis. To the country’s fortune, no meltdowns occurred as during the previous 1997 Asian crisis.

Fall in the growth rate of personal consumption and expenditures and fixed investment assail 2008. Personal consumption expenditure, the largest contributor to GDP growth, behaved a downward trend from a sharp drop from 5.8 percent in 2007 to 4.7 percent in 2008, and 3.7 percent in 2009. GDP growth during fourth quarter of 2008 and first quarter of 2009 fell to 1.7 percent, a staggering fall from 5.7 percent average for the three previous years. Furthermore, a contraction of 29.2 percent in the manufacturing sector involving electricity, gas, water, trade and finance services. The service sector also had its share of downturns as growth in the fourth quarter and first quarters of 2008 and 2009, respectively, suffered from a meagre growth of 2.1 percent, a far contrast from the 6.7 percent average from the last three years. However, the Philippines has generally endured the least declines in comparison with other East Asian countries despite recorded declines. For instance, OFW remittances, though at a slower pace, still grew in the first half of 2009.

Impact of fiscal deficit and external accounts

To counter adverse effects of the crisis, the Philippine government felt the need to increase its expenditures. Apart from government expenditure, of primary concern was the weak revenues generated by the government with fiscal deficit reaching P111.8 billion in the first quarter of 2009 as compared to P25.8 billion in the same period of the previous year. Despite suffering the least in terms of the stock exchange and financial markets among East Asian countries, the Philippines lagged in tax effort in comparison to other nations. Meanwhile, private sector flows in the external account declined and led to a net outflow of $708 million in 2009, a sharp turning away from a net inflow of $507 million in 2008. This eventually led to a fall in stock prices and depreciation or devaluation of the peso.

Poverty and Social Impacts

Impacts on households and communities

An increasing number of the Filipino workforce has become frustrated due to unemployment and low standards of living in the country. Thousands of Filipinos leave the country every day to seize better income opportunities and promise their children a better and secure future. Moreover, around five million of Filipino children are unable to go to school and are forced to work on the streets or in other various workplaces where they can find some food or other means to fill their appetites.

Impacts on wealth and income and its distribution across different social divisions

The country was having sound economic indicators before the 2008 economic crisis. Average income per capita was increasing while poverty incidence showed a downward trend. Average income per capita rose by 2% in 2007 and 2008, whereas poverty incidence dropped from 33.0% in 2006 to 31.8% in 2007 and 28.1% in 2008. Output growth plunged in 2009, causing real mean income to fall by 2.1%, resulting in an upward pressure on poverty incidence (grew by 1.6%). Most hit are households with associations to industry resulting in the average income to drop to levels below that of 2007. Similarly, wage and salary workers were hit significantly. Surprisingly, the poorest 20% did not suffer the same fate they suffered in crises past. Clearly, the global economic crisis put a halt on the highly promising growth trend of the Philippine economy and forced 2 million Filipinos into poverty.

Coping strategies

i. Finances

to recent studies (2009), close to 22% of the population reduced their     spending, 11% used their existing savings for consumption, 5% pawned assets, 2% sold assets,    36% borrowed money and 5% defaulted on debts.

ii. Education

To reduce spending, households had to risk the quality of education of their children. Some children were transferred from private to public schools, while some were withdrawn from school. Moreover, parents reduced the allowance of the students, and resorted to secondhand uniforms, shoes and books.

iii. Health

Coping strategies may have negative effects on their long-term health as these affected households commonly resort to self-medication, or shift to seeing doctors in government health centers and hospital. Many households in the urban sector shifted to generic drugs while rural households tended to use herbal medicines.

Policy Responses

Efforts of poverty alleviation, reduction, eradication

The Medium-Term Philippine Development Plan (MTPDP) was implemented during the Ramos Administration and later on continued by the following administrations to help reduce poverty in the country and improve on the economic welfare of the Filipinos. The Ramos Administration (1993–1998) targeted to reduce poverty from 39.2% in 1991 to about 30% by 1998. The Estrada Administration (1999–2004) then targeted to reduce poverty incidence from 32% in 1997 to 25-28% by 2004, while the Arroyo government targeted to reduce poverty to 17% by creating 10 million jobs but this promise was not fulfilled by the administration. As for the current Aquino Administration, the 2011-2016 MTDPD is still being drafted.

President Benigno Aquino III has plans to expand the Conditional Cash Transfer (CCT) program from 1 to 2.3 million households, and several long term investments in education and healthcare. Also, last September 2010, Aquino met with US Secretary of State, Hillary Clinton, during the signing of the $434-million Millennium Challenge Corporation (MCC) grant in New York. The MCC grant would fund infrastructure and rural development programs in the Philippines to reduce poverty and spur economic growth.

Macroeconomic and Social Protection programs

To respond to the recent financial crisis, the Philippine government, through the Department of Finance and National Economic and Development Authority (NEDA), crafted a PhP 330-billion fiscal package, formally known as the Economic Resiliency Plan (ERP). The ERP is geared towards the stimulation of the economy through tax cuts, increased government spending, and public-private sector projects that can also prepare the country for the eventual upturn of the global economy.

The implementation of ERP is spearheaded by NEDA with the following specific aims:

• To ensure sustainable growth, attaining the higher end of the growth rates;
• To save and create as many jobs as possible;
• To protect the most vulnerable sectors: the poorest of the poor, returning OFWs, and workers in export industries;
• To ensure low and stable prices to supports consumer spending; and
• To enhance competitiveness in preparation for the global rebound.

Regional responses

Poverty incidence remains to be one of the highest in the region with the continued low domestic private investment. To overcome legal, political and institutional constraints, regional financial cooperation must be encouraged. The ASEAN+3 financial cooperation can promote further the development of domestic financial markets to facilitate the intermediation of Asian savings within the region, as well as attract foreign investment. Such alternative sources of funding would reduce Asia’s reliance on foreign currency borrowing and along with, the risk exposure of the region to maturity and currency mismatches.

Moreover, the Network of East Asian Think Tanks has recently proposed the establishment of the Asia Investment Infrastructure Fund (AIIF) to prioritize the funding of infrastructure projects in the region to support suffering industries. The AIIF, as well as multilateral institutions especially the Asian Development Bank, also promotes greater domestic demand and intra-regional trade to offset the decline in exports to industrialized countries and narrow the development gap in the region.

Prospects for Growth in the Future

Poverty reduction for the Philippines in the years to come is promising, bearing in mind where she left off prior to the economic crisis. Nevertheless, it is still a tough challenge. Figures persistently reflect a Philippine poverty reduction campaign that pales in comparison with other ASEAN countries. In addition, a blistering population growth rate sinks more Filipinos below the poverty threshold placing the country’s laudable long term economic growth under its shadow.

Taking into account that the Philippine economy has a significant reliance on remittances from Overseas Filipino Workers (OFWs), past threats demonstrated the resiliency of the Philippine economy despite external shocks. In spite of the disaster in Japan (3rd largest market for Philippine exports) and the geopolitical tensions in West Asia, the Philippine economy looked unfazed. New York-based Global Source Partners stated, "The Philippine economy has already proven to be quite resilient in the face of varied external shocks in the past, yow especially bolstered by a strong external position and capable monetary management. This time should not be much different.”

The new administration of President Benigno “Noynoy” Aquino III faces three key constraints on Philippine growth:

1. Tight fiscal situation due to weak revenue generation
2. Poor infrastructure (i.e. transportation, power, etc.)
3. Pessimism in investment resulting from corruption and political instability

Fortunately, the government offers various projects to loosen these restrictions. Data from the quarterly ING Investor Dashboard Survey showed stability in investor confidence for the Philippine economy over the first two quarters of 2010. She even scored a 157 in the third quarter of the same year. This is well on the higher percentiles of the “optimistic” range and a mere 3 points from the “very optimistic” level. These figures emerge in the midst of decrepit infrastructure and a lack of efficient institutions. Subsequently, the prospect of the Philippine economy improving into the “very optimistic” range is very bright. Presidential spokesman Edwin Lacierda declared that the Philippine economic competitiveness score improved from 56.526 the previous year to 63.291 in 2011 (based on The World Competitiveness Yearbook). Lacierda also boasts of infrastructure improvement projects of the Department of Public Works and Highways scheduled to commence within one or two years. He attributes the stepping up of our competitiveness rating to the public-private partnership (PPP) projects next year. These projects raise optimism for the post-crisis economy of the Philippines.