PHILIPPI NE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
DEVELOPMENT RESEARCH NEWS January - February 2010
Editor' Editor'ss Notes The previous year saw the Philippines dealing with the aftermath of the 2008 global financial and economic crisis and the impacts of the devastating natural calamities that hit the country during the last quarter. This year, with the political noise brought about by the upcoming national elections as backdrop, what could be in store for the Filipinos in 2010? In keeping with tradition, Philippine Institute for Development Studies (PIDS) President Dr. Josef Yap, this year joining forces with PIDS Senior Research Fellow Dr. Ruperto Majuca, gives us a glimpse of 2010 in this economic forecast. The two examine the outcomes of the 2008 financial crisis on the Philippine economy and how the different sectors—trade, production, employment, household— reacted to the downturn. As controversial as the 2008 crisis itself are the stimulus packages introduced by the government in response to the crisis. Hence, in this piece, Dr. Yap and Dr. Majuca included an evaluation of the government’s “Economic Resiliency Plan.” Their evaluation provides an insight on whether these measures have helped lessen the depth of the crisis and whether these measures came at the right time for a more optimal effect. Anchoring on prospects expected to come out of the global economic recovery, Dr. Yap and Dr. Majuca also give us a peek on prospects for the Philippine economy in 2010. At the local front, for example, we can anticipate positive outcomes from election-related spending; however, the El Niño phenomenon is posing a significant negative impact on agriculture. On the other hand, we can expect positive gains from the other sectors as their momentums are likely to be maintained. Indeed, 2010 is going to be a very interesting year. DRN
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Vol. XXVIII No.1
ISSN 0115-9097
The Philippine Economy in 2009 and Prospects for 2010 Josef T. Yap and Ruperto P. Majuca*
T
he downturn of the Philippine economy in 2009 was much sharper than initially anticipated. The major economic forecasts were higher than the actual gross domestic product (GDP) growth of 0.9 percent in 2009 (Table 1). The latest revised forecasts by the same organizations indicate the deteriorating economic conditions during the year. There are two main reasons for the adverse outcome. One, the recession in industrialized economies was deeper and longer than initially forecast resulting in a sharp contraction in exports from emerging markets, including the Philippines. Two, the country was buffeted by severe natural disasters in the last quarter of the year. This edition of the Development Research News (DRN) examines the impact of the 2008 financial and economic crisis on the Philippine economy based on full year 2009 data. Earlier studies tracked the initial impact of the crisis with the use of partial data.1 The most pressing policy issue as of this writing is the timing of the withdrawal of the stimulus measures, referring particularly to higher government expenditures and looser monetary policy. Tightening of fiscal and monetary policy that is too early may jeopardize the nascent recovery that was manifest in the fourth quarter of 2009. A withdrawal that comes too late may ignite a fiscal crisis and/or stoke inflationary pressure, leading to a sharp depreciation of the peso. The resulting macroeconomic instability will be an added burden to an already fragile economy.
* Respectively, President and Senior Research Fellow, Philippine Institute for Development Studies. The excellent Research Assistance of Ms. Fatima Lourdes E. Del Prado is gratefully acknowledged. The usual disclaimer applies. 1 For example see last year’s DRN, Yap, Reyes and Cuenca (2009), Majuca and Yap (2010), and Reyes, et al (2009).
2
DEVELOPMENT RESEARCH NEWS
January - February 2010
Table 1: Comparison of 2009 GDP Growth Forecasts Initial Forecast (%) Updated (%)
DRN 2009
ADB
IMF
World Bank
4.3
2.5
3.8
3.0
1.6
1.0
1.4
-
Note: Actual 2009 GDP growth is 0.9 percent based on the January 2010 National Income Accounts. Sources of Data: ADB Asian Development Outlook, IMF World Economic Outlook and World Bank East Asia Economic Update.
In the medium term, the focus will be on the economic agenda of the next Philippine President. Unfortunately, he will be in an unenviable position. As discussed in the aforementioned studies, the major reason the Philippines escaped a recession is because of an economic structure that prevented it from developing rapidly like its neighbors during the past six decades. A case in point is exports, which have relatively low value added from the domestic economy. The contraction in global trade thus had a milder impact on Philippine GDP compared to Thailand, Malaysia, and Korea. However, it is this low value added that constrained development prior to the crisis. Another factor is the role of foreign firect investment (FDI) in the Philippines where it has not been a source of economic growth in the same degree as its neighbors in East Asia. Impact of the 2008 Global Financial and Economic Crisis on the Macroeconomy
The T rade Channel Trade As discussed earlier, the spill-over effects of the global economic and financial crisis on the real sector of the Philippine economy came primarily through the trade channel. Exports contracted by 21.9 percent in 2009 (Table 2). This is due in large part to the weaker demand for electronics and garments in the international market. Monthly data also show that merchandise exports have been contracting since October 2008, hitting a bottom sometime in the first quarter of 2009 (Figure 1). Exports showed a strong recovery in November and December 2009, growing by 5.7 and 23.5 percent year-on-year, respectively. Electronic products, which comprise about 60 percent of merchandise exports, have consistently contracted since August 2008. This contraction in the electronic products
exports also reached bottom around the first quarter of 2009. This category likewise recorded an increase in November 2009.2 Meanwhile, imports also fell year-on-year in 2009 (Table 2) because the significant declines in the demand for materials and intermediate goods utilized in the production of export products. Falling oil prices in the global market also contributed to the decline in imports in nominal dollar terms.
Production and Expenditure On the production side, significant contractions occurred in manufacturing and electricity, gas, and water leading to a fall in industry sector output in 2009 (Table 2). Meanwhile, there was a sharp deceleration in the agriculture sector and the transport, communication and storage sub-sector. The manufacturing sector was adversely affected by the contraction in exports during this period. The food manufacturing sector did not cushion the fall as it did in 2008 primarily because of the poor performance of the agriculture sector. The latter was buffeted by extreme weather conditions, including the devastating typhoons in the last quarter of 2009. Disaggregated data in Table 3 indicate a contraction in agriculture output in this period, the first recorded since first quarter 2005. The rather surprising outcome was the continued weakness in the service trade
2
Business process outsourcing, a component of non-factor services exports, remained a bright spot. National accounts data show that the exports of miscellaneous services (which include business process outsourcing such as call centers and back office accounting and payroll), after slowing down to a mere 4 percent year-on-year growth in the fourth quarter of 2008, accelerated by 56.1 percent and 16.7 percent quarter-on-quarter in the first and second quarter of 2009, respectively. However, this went down to 0.8 percent during the third quarter and slid further to -13.8 percent in the last quarter of 2009.
3
DEVELOPMENT RESEARCH NEWS
January - February 2010
Table 2: Selected Macroeconomic Indicators, Philippines Annual Growth Rates and Share to GDP At Constant 1985 Prices, in percent unless otherwise stated 2004
2005
2006
2007
2008
2009
Forecast 2010
6.9 6.4
5.3 4.9
6.1 5.4
6.9 7.1
6.2 3.8
3.0 0.9
5.0 4.0
5.2 19.6
2.0 19.1
3.8 18.8
4.8 18.4
3.2 18.3
0.1 18.1
0.5
Agriculture and fishery
5.0 19.5
2.0 19.0
3.9 18.7
4.8 18.3
3.2 18.2
0.1 18.0
1.0
Forestry
53.3 0.1
4.1 0.1
(3.9) 0.1
(0.4) 0.1
1.7 0.1
(1.0) 0.1
-
Industry Sector (share to GDP)
5.2 33.1
3.8 32.8
4.5 32.5
6.8 32.4
5.0 32.8
(2.0) 31.8
3.4
2.6 1.6
9.3 1.7
(6.1) 1.5
26.1 1.7
1.9 1.7
21.1 2.0
15.0
5.8 24.1
5.3 24.2
4.6 24.0
2.9 23.1
4.3 23.2
(5.1) 21.8
3.0
Construction
3.4 4.2
(5.9) 3.8
7.3 3.9
23.7 4.5
7.8 4.6
5.8 4.9
6.0
Electricity, Gas and Water
4.2 3.2
2.5 3.1
6.4 3.1
6.7 3.1
7.3 3.2
(2.8) 3.1
5.5
Service Sector (share to GDP)
7.7 47.3
6.8 48.1
6.7 48.7
8.1 49.2
3.3 48.9
3.2 50.0
5.0
Transport, communication and storage
11.2 8.5
7.3 8.7
6.3 8.7
8.3 8.8
4.2 8.9
1.8 8.9
5.0
Trade
6.8 16.7
5.6 16.8
6.1 16.9
8.3 17.1
1.2 16.7
2.9 17.0
4.5
Finance
9.9 4.9
13.6 5.3
11.4 5.6
12.9 6.0
2.5 5.9
7.1 6.2
7.0
Ownership of dwellings and real estate
5.3 4.6
5.3 4.7
5.7 4.7
5.8 4.6
5.7 4.7
(1.0) 4.6
5.0
10.6 8.1
7.5 8.3
6.9 8.4
8.4 8.5
4.9 8.6
3.8 8.8
4.5
0.5 4.4
3.0 4.4
4.7 4.3
2.6 4.1
5.5 4.2
5.0 4.4
5.5
5.9 78.3
4.8 78.3
5.5 78.3
5.9 77.4
4.7 78.1
3.8 80.3
4.30
1.4 6.5
1.6 6.3
6.1 6.4
11.6 6.6
3.2 6.6
8.5 7.1
5.50
Capital Formation (share to GDP)
7.2 20.3
(8.8) 17.6
2.7 17.2
14.9 18.4
1.7 18.1
(9.9) 16.1
4.80
Exports (nominal $) Imports (nominal $)
9.5 8.8
4.0 7.7
14.9 9.2
6.4 7.2
(2.8) 2.2
(21.9) (24.2)
7.00 10.00
Inflation (2000=100) (average)
5.7
7.0
5.5
2.8
9.3
3.4
4.00
91-Day Treasury Bill Rate (average)
7.3
6.4
5.4
3.4
5.4
4.2
5.00
56.0
55.1
51.3
46.1
44.5
47.6
46.50
Gross National Product Gross Domestic Product Agriculture, Fishery and Forestry (share to GDP)
Mining and quarrying
Manufacturing
Private services
Government services
Personal Consumption Expenditure (share to GDP) Government Consumption (share to GDP)
Nominal Exchange Rate (P/$ average)
Source: National Accounts of the Philippines, National Statistical Coordination Board; Selected Philippine Economic Indicators, Bangko Sentral ng Pilipinas; National Statistics Office; Forecasts of J. T. Yap.
DEVELOPMENT RESEARCH NEWS
4
sector. The latter, which contributes 17 percent to GDP, is normally spared the harshest effects of economic downturns. While value added in the service trade sector managed to grow at a higher rate in 2009 compared to 2008—2.9 percent and 1.2 percent, respectively— it was still lower than the growth rate of personal consumption expenditure in both years (Table 2). This disappointing result combined with the expected downturn in the transport, communication, and storage sector—which is driven by the level of economic activity— led to weak growth in services output. With regard to the expenditure sector, it was expected that since total private investment had been sluggish for the past decade, there would be little room for further deterioration.3 Unfortunately, fixed capital formation declined by 3.5 percent in 2009, with both durable equipment and private construction experiencing contractions (Tables 2 and 3). Future production capacity remains to be a serious problem for the Philippine economy. Only public construction activity was buoyant, expanding by 15.7 percent in 2009 (Table 3) largely because of the Economic Resiliency Plan (ERP), which is the package of stimulus measures implemented by the Government.4 However, the momentum was not sustained and public construction actually fell in the fourth quarter of 2009. Because of the transient nature of the stimulus package, private investment has to be revived if economic growth is to be sustained at higher levels. This should be of utmost priority in the next administration. The only bright spot is that personal consumption expenditure recovered from a dismal first quarter to post 3.8 percent growth in 2009 (Tables 2 and 3). This was largely driven by overseas remittances which still posted robust growth in peso terms (Table 3). However, personal consumption has limited multiplier effects and cannot be relied on to spur economic development.
January - February 2010 Impact on Employment
Domestic Employment 5 Looking at the unemployment rate trends alone may mask the true impact of the crisis on domestic employment. Official data report only a marginal overall increase in unemployment rates in the country, from 6.8 percent in October 2008 to 7.1 percent in October 2009. This gives the impression that the global crisis has had a minimal effect on domestic employment. This may be misleading because the main impact of the crisis on Philippine domestic employment came more from the reduction of working hours/ days instead of the firms permanently laying off workers, under the so-called “flexible work arrangements” encouraged by the government, as well as in the reduced hiring rates. The data do not indicate the difficult adjustment process in the labor market. An examination of the detailed disaggregated employment statistics in 2008 and in the first three quarters of 2009 as seen in Table 4 shows this. Table 4 indicates that the rate of new hiring decreased from 12.23 percent in the first quarter of 2008 to 9.29 percent in the first quarter of 2009, a reduction of almost 3 percent in the new hiring rate. The decline in the rate of hiring continued in the second and third quarters of 2009. Meanwhile, compared to their year-ago levels, separation rates increased by 1.56 percent in the first quarter of 2009, decreased a bit by 1.04 percent in the Q2 2009, and increased marginally by 0.62 percent in Q3 2009. This means that the overall impact of the crisis was felt more on the rate of hiring than on the separation rate. If the effects of the hiring and separation rates are combined, labor turnover rates deteriorated by 4.5 percentage points in the first quarter of 2009, showed a marginal improvement in the second quarter, and deteriorated again by 1.68 percentage points in the third quarter. The manufacturing sector, which bore the brunt of the crisis, registered the highest spikes in separation rates.
3
A World Bank study explains the dilemma of rising economic growth and declining investment. See A. M. Bocchi (2008): “Rising growth, declining investment: the puzzle of the Philippines.” Policy Research Working Paper No. 4472. East Asia and Pacific Region. World Bank. 4 See Box for an evaluation of the stimulus measures.
A look into the breakdown of employment into “full-time” employment (working more 5
This section is derived from Majuca and Yap (2010).
5
DEVELOPMENT RESEARCH NEWS
January - February 2010
Figure 1: Growth rates of merchandise exports and major export products (in percent)
Source: National Statistical Coordination Board
Table 3: Key Indicators of the Philippines, 2009 Disaggregated 1/ 2007 GDP Agriculture Industry Manufacturing Construction Services Transp, Comm, Storage Trade Personal Consumption Fixed Capital Construction Public Construction Private Construction Durable equipment Exports (US$) Imports (US$) Remittances (PhP) Inflation (average; 2000=100)
7.1 4.8 6.8 3.3 21.1 8.1 8.3 8.2 5.8 10.9 19.4 29.2 13.0 4.5 6.4 7.2 1.8 2.8
2008 3.8 3.2 5.0 4.3 7.8 3.3 4.2 1.2 4.7 2.9 4.6 -0.4 8.2 1.9 -2.8 2.2 9.8 9.3
2009 0.9 0.1 -2.0 -5.1 5.8 3.2 1.8 2.9 3.8 -3.5 3.9 15.7 -4.2 -11.4 -21.9 -24.2 13.2 3.4
1Q2009
2Q2009
3Q2009
4Q2009
0.6 2.1 -2.5 -7.6 14.0 2.0 5.6 0.4 1.3 -7.2 6.7 11.5 4.3 -18.5 -36.8 -34.3 19.8 6.9
0.8 0.2 -1.7 -7.4 14.0 2.7 1.0 2.7 5.4 -3.9 8.9 27.7 -10.1 -19.7 -28.9 -28.0 14.7 3.2
0.4 1.5 -5.0 -7.8 0.9 3.8 -1.5 4.4 3.2 -0.9 1.7 21.8 -9.4 -4.2 -21.5 -28.5 13.1 0.3
1.8 -2.8 1.1 1.3 -5.8 4.2 1.9 3.5 5.1 -1.6 -2.9 -7.2 -0.1 -0.1 5.1 -0.3 6.5 2.9
All figures are growth rates, y-o-y, in percent unless otherwise indicated; variables are based on constant prices except for remittances, exports and imports. Sources: Bangko Sentral ng Pilipinas, National Statistics Office, and National Statistical Coordination Board, Philippines.
1/
13.51 15.83
10.82 14.24
Wholesale and Retail Trade
Hotels and Restaurants
6.02
4.96
Financial Intermediation
Source: Bureau of Labor and Employment Statistics.
Personal Service Activities
10.74
6.68
4.86
Health and Social Work 9.38
7.34
1.66
10.88
7.06
7.34
14.86
5.01
5.61
22.64
12.18
11.65
12.41
3.44
8.45
11.2
9.29
1.99
8.67
6.2
11.05
3rd Qtr
Accession Rate
8.13
4.96
3.78
10.94
4.98
3.31
12.62
12.61
9.29
5.74
1.08
10.68
7.47
8.95
1.31
2.54
2.14
9.14
4Qtr
9.78
5.89
5.03
16.03
5.24
4.96
16.33
12.28
11.51
14.29
2.13
7.33
10.91
8.86
2.65
5.1
4.26
10.75
Average
10.15
4.92
2.74
11.02
3.27
3.34
11.86
9.1
7.85
19.24
8.92
2.46
1.92
6.7
5.2
2.37
4.12
7.46
1st Qtr
9.95
5.28
16.09
9.96
4.15
4.23
11.44
11.9
8.66
22.05
1.26
3.87
16.81
8.49
3.03
1.88
2.34
8.57
2nd Qtr
8.16
4.95
2.34
8.64
3.3
3.58
40.98
12.72
8.6
16.39
1.41
8.82
11.35
10.44
1.74
5.41
4.05
9
3rd Qtr
8.29
3.76
3.19
7.56
2.54
3.41
8.31
13.93
7.22
19.9
0.92
10.58
15.82
12.46
1.93
4.22
3.68
8.45
4Qtr
Separation Rate
9.14
4.73
6.09
9.3
3.32
3.64
18.15
11.91
8.08
19.4
3.13
6.43
11.48
9.52
2.98
3.47
3.55
8.37
Average
6
Other Community, Social and
14.62
23.69
Business Services
Private Education
Real Estate, Renting and
5.31
5.59
Communications
Transport, Storage and
11.64
13.46
3.87
6.32
Manufacturing
Service
9.97
14.98
Mining and Quarrying 2.13
7.54
9.67
Industry
18.93
2.54
4.74
Fishing
1.87
5.78
3.39
Agriculture, Hunting and Forestry
20.08
4.47
4.23
Agriculture, Fishing and Forestry
Construction
10.56
12.23
All Industries
Electricity, Gas and Water Supply
2nd Qtr
1st Qtr
Major Industry Group
Table 4: Labor turnover rates in large enterprises in Metro Manila by industry : 2008 (in percent)
DEVELOPMENT RESEARCH NEWS January - February 2010
8.19 8.8 16.38 5.76 4.88
8.13 16.69 9.09 3.26
Construction
Service
Wholesale and Retail Trade
Hotels and Restaurants
Transport, Storage and
11.61
3.74
4.95 12.25
1.28
Source: Bureau of Labor and Employment Statistics.
Personal Service Activities
Other Community, Social and
Health and Social Work
Private Education
0.64
1.21
-0.28
-1.79
-0.36
-1.63
3.33
0.31
-0.67
14.98
-0.53
-1.38
2.37
3.39
2.97
1.13
2.07
0.27
Difference
Percent
15.23
4.45
10.40
10.76
3.62
3.63
10.66
10.26
8.33
21.88
3.70
12.73
19.31
14.67
3.57
2.76
3.21
9.74
Rate
Accession
6.96
5.17
5.97
7.92
2.85
3.42
8.68
9.65
6.58
13.55
2.05
10.49
12.23
10.80
5.64
3.13
4.53
7.53
Rate
Separation
2ND Quarter
8.28
(0.72)
4.42
2.84
0.78
0.21
1.98
0.61
1.75
8.33
1.65
2.24
7.08
3.87
(2.07)
(0.37)
(1.32)
2.21
Difference
Percent
15.09
5.50
2.57
11.79
2.60
4.29
8.99
9.74
8.89
21.10
2.32
12.32
15.98
13.93
5.07
9.96
7.35
9.99
Rate
Accession
13.02
3.95
1.69
11.16
2.78
3.62
6.22
1.39
8.16
25.60
1.73
12.22
14.46
14.85
4.62
7.31
5.87
9.62
Rate
Separation
3RD Quarter
2.06
1.55
0.88
0.63
(0.17)
0.67
2.76
2.52
0.72
(4.50)
0.58
0.10
1.52
(0.92)
0.45
2.65
1.48
0.37
Difference
Percent
7
1
9.61
Real Estate, Renting and
Business Services
3.25
2.9 7.82
Financial Intermediation
Communications
3.57
3.05 23.16
Electricity, Gas and Water Supply
Mining and Quarrying 11.2
10.02
13.41
Industry 14.63
1.07
4.04
Fishing
17
2.09
3.22
Agriculture, Hunting and Forestry
9.82
1.57
3.64
Agriculture, Fishing and Forestry
Manufacturing
9.02
Rate
Rate 9.29
Separation
Accession
1ST Quarter
All Sectoral Groups
SECTOR
Table 4 (cont'd.): Labor turnover rates in large enterprises in Metro Manila by industry : 2009 (in percent)
DEVELOPMENT RESEARCH NEWS January - February 2010
DEVELOPMENT RESEARCH NEWS Box 1:
8
January - February 2010
Evaluation of Stimulus Measures
O
n January 27, 2009, the Philippine government launched a P330 billion fiscal stimulus program dubbed the “Economic Resiliency Plan�, with the following components: community-level infrastructure and social welfare (about half of the budget), large infrastructure projects (30 percent off-budget, part of the funds will be provided by social security and government financial institutions), tax cuts to individuals and businesses, and additional social security benefits (about 20 percent; off-budget, to be taken from the gap between contributions and claims/benefits). The plan focuses on quick-disbursing, high job-generation impact type of projects such as construction, repair, or rehabilitation of irrigation systems, and rural roads. The Bangko Sentral ng Pilipinas cut policy rates six times, starting in December 2008 until July 2009. The cumulative reduction was 200 basis points, ending with 6.0 percent for the repurchase facility (overnight lending rate) and 4.0 percent for the reverse repurchase facility (overnight borrowing rate); it has maintained the rates steady since then. It had also cut the reserve requirements by 2 percentage points and took other steps to hold up liquidity. The monetary and fiscal responses to the crisis as well as the other government measures helped somewhat to lessen the depth of the crisis in the Philippines and alleviate its effects on the vulnerable sectors. However, some analysts—including these authors—are of the opinion that the fiscal and monetary responses were implemented later than optimal. As early as the beginning of 2008, or by the middle of 2008, at the latest, it was painstakingly clear that the US economy would experience a recession. For example, in February 2008, Greenspan said the chance of a US recession is 50 percent or higher; more than 70 percent of economists surveyed in March 2008 believed the US economy was in a recession; and on December 1, 2008, the National Bureau of Economic Research (NBER) declared that the US economy has
been in recession since December 2007. In the Philippine local setting, the following is the timeline of the impact of the crisis and the release of available data to policymakers: • January 2008: the Philippine stock index dropped 9.8 percent month-on-month; and continued to drop until January 2009, predicting a downturn of economic activity ahead; • August 2008: electronic products exports contracted 6.5 percent and have been contracting since; • August 12, 2008: the data were released with the information that the third quarter leading economic indi cators fell, suggesting a decelera tion of the economy; • September 2008: inflation rate’s tra jectory went down; • October 2008: total merchandise exports contracted by 14.9 percent, and have been contracting since; industrial production (both volume and value) growth also dropped (both month-on-month and year-onyear) and has been dropping since; • November 4, 2008: data released showed that the fourth quarter lead ing indicator dropped further, sug gesting continued weakening of economic activity; • November 2008: capacity utiliza tion fell and has been dropping since; • December 18, 2008: the central bank finally cut policy rates; • January 27, 2009: the government unveiled its fiscal stimulus plan; • First quarter 2009: probably the bottom of the global crisis and its Philippine impact. Given the available data (both domestic and international) and the well-known time lags for policy to gain traction, particularly fiscal policy, it is clear that the fiscal and monetary authorities should have acted earlier. Output and employment data indicate that the macroeconomic programs of the Government had moderate success. As mentioned earlier, value added from public con-
16
9
DEVELOPMENT RESEARCH NEWS than 40 hours per week) and “part-time” employment, during the relevant periods would help shed light on the issue of quality of employment. The proportion of part-time workers to those who are employed and at work increased from an average of 35.5 percent in 2008 to 37 percent in January 2009, and according to preliminary data, this accelerated further to 42 percent in the second quarter of 2009 (Table 5). However, the data indicate that this stabilized at 34.5 percent in July and 36.8 percent in October 2009. In absolute terms, this meant that there were around 1.6 million full-time jobs lost from January 2008 to April 2009, and about 2.45 million part-time jobs were created during the same period (Table 5). As mentioned earlier, the impact of the crisis was more of a reduction in work-hours and subsequent increase in underemployment. Overall, the reduction in the hiring rate was felt most in the first quarter of 2009 while the deterioration in the quality of jobs—as evidenced by the reduced work
January - February 2010
hours—peaked in the second quarter of 2009, the same quarter where the increase in the separation rate in the manufacturing sector was the highest. Full time employment as of July 2009 seems to have returned to its level in 2008. Hence, at the macroeconomic level, the employment impact of the crisis can be described as mild. However, there was indeed a difficult adjustment process during this period.
Overseas Employment Critical to the economic performance of the Philippines is the impact of the recession in major economies on employment of overseas Filipino workers (OFWs). Remittances have been the lifeblood of the economy during the past decade. In 2008 alone, remittances—as reported in the balance-of-payments account— amounted to $16.4 billion or 13 percent of GDP. Data from the Philippine Overseas Employment Administration (POEA) indicates that during the first 11 months of 2009, the num-
Table 5: Employed persons by number of hours per week worked, Philippines* 2007
2009
2008 Ave
Jan
Apr
Jul
Oct
Ave
Jan
Apr
Jul
Oct
33560
34089
33693
33535
34593
34533
35061
34262
34997
35509
35477
At Work
33098
33593
33283
32702
34253
34133
34490
33687
34157
35160
34958
Worked Less Than 40 Hours
Number of hours worked Total Employed Workers
12254
11938
11877
11954
11709
12211
12945
12453
14333
12115
12881
As % of those ‘At Work’
37.0
35.5
35.7
36.6
34.2
35.8
37.5
37.0
42.0
34.5
36.8
Less Than 20 Hours
4321
4212
4325
4288
3942
4292
4671
4577
5115
4354
4636
20 - 29 Hours
3951
3780
3764
3775
3778
3801
4122
3922
4725
3792
4047
30 - 39 Hours
3982
3947
3788
3891
3989
4118
4154
3953
4493
3969
4199
20844
21655
21407
20748
22544
21922
21545
21234
19824
23044
22076
63.0
64.5
64.3
63.4
65.8
64.2
62.5
63.0
58.0
65.5
63.2
13243
13831
13754
12991
14385
14195
13665
13483
12644
14442
14089
7601
7824
7653
7757
8159
7727
7880
7750
7180
8602
7987
462
496
410
833
340
400
571
575
838
350
520
41
42
42
42
43
42
41
41
40
43
41
Worked 40 Hours and Over As % of those ‘At Work’ 40 - 48 Hours 49 and Over 49 and Over With a Job, Not at Work Mean Hours Work
*In thousands except hours worked Source: Bureau of Labor and Employment Statistics
10
DEVELOPMENT RESEARCH NEWS
January - February 2010
Table 6: Overseas remittances (thousand US dollars) 2007
Growth
2008
Growth
(%)
2009
(%)
Growth (%)
TOTAL
14,449,928
13.2
16,426,854
13.7
17,348,052
5.61
Jan
1,099,354
19.9
1,264,036
15.0
1,265,515
0.12
Feb
1,085,544
25.4
1,258,638
15.9
1,320,032
4.88
Mar
1,304,847
26.4
1,427,807
9.4
1,471,482
3.06
Apr
1,191,540
32.6
1,410,210
18.4
1,441,741
2.24
May
1,237,140
8.4
1,429,832
15.6
1,482,175
3.66
Jun
1,115,753
1.0
1,450,838
30.0
1,498,737
3.30
Jul
1,096,558
4.6
1,366,796
24.6
1,494,038
9.31
Aug
1,206,942
10.6
1,332,023
10.4
1,369,084
2.78
Sep
1,139,845
12.4
1,332,912
16.9
1,446,917
8.55
Oct
1,388,459
17.1
1,434,726
3.3
1,531,294
6.73
Nov
1,186,970
3.8
1,311,322
10.5
1,459,162
11.27
Dec
1,396,976
5.9
1,407,714
0.8
1,567,875
11.38
Source: Bangko Sentral ng Pilipinas
ber of Filipinos deployed abroad rose considerably, by 11.7 percent to 1,284,133 compared to 1,149,429 in the same period in 2008. In 2008, deployment rose by 14.7 percent to 1,236,013 from 1,077,623 in 2007. However, there is concern that the slump in global shipping will adversely affect Filipino maritime workers. But anecdotal evidence shows that some shipping lines are replacing highly paid Western nationals with lower paid Filipinos.6 As of this writing, there is no clear indication on the number of layoffs as a result of the global crisis. However, the data indicate a slowdown in the growth of remittances to only 5.6 percent in 2009 compared to 13.7 percent in 2008 (Table 6). The trend stands in stark contrast to the pessimistic view of the World Bank, which predicted a contraction of 4 percent in 2009. Slower growth, however, had a negative impact on the real sector, particularly on personal consumption expenditure but this was partially offset by a higher exchange rate. If remittances are converted to peso terms, the growth in 2009 was actually much higher 6
Part of this discussion was lifted from the analysis and comments of the Joint Foreign Chambers of the Philippines entitled "Impact of the Global Economic Crisis on the Philippines: Preparing to Rebuild Foreign Investment Inflows," June 2009.
than the annual increases in 2007 and 2008 (Table 3). Impact on Households and Communities 7 The economic downturn in 2009 has likely negative social impacts. It would be important to analyze these impacts at the level of individuals, households and communities in order to design countervailing measures and monitor their effectiveness. Unfortunately, while monthly or quarterly data on economic output and prices are available, data on social indicators have lower frequency and, in certain cases, are irregular. For example, assessing the impact of the crisis on poverty in the Philippines based on official data would not yet be possible since the latest official poverty statistics were obtained in 2006 and the next set would be available only late next year when the results of the 2009 Family Income and Expenditure Survey (FIES) are made available. Thus, to assess the social impacts of the crisis, data collected by local government units using the community-based monitoring system (CBMS) will be used. As part of research efforts to monitor and mitigate the impacts of the global financial and economic crisis, the CBMS Network 7
Largely based on Reyes, Sobrevi単as and de Jesus (2009).
11
DEVELOPMENT RESEARCH NEWS
January - February 2010
launched an initiative to conduct household surveys in selected areas in 10 countries that are implementing CBMS in Asia and Africa. Information from these poverty observatories or sentinel sites has been collected over several years, thus providing a benchmark for assessing the effects of the crisis. Data collected from March 2009 would then provide information not just on the impacts of the crisis but would also show which individuals, households and communities are able to recover faster.
or 12.8 percent had a member who is an OFW (Table 8). Two hundred and one (201) of the 450 households, or 44.7 percent, had an OFW who returned during the period between November 2008 and April 2009. However, only 25 of these returnees—which is 5.6 percent of 450—indicated retrenchment or lay-off as the reason for returning home. Another way to look at it is that 5.6 percent of households which rely on OFW remittances saw this source of income disappear as a result of the crisis.
In the Philippines, there are 13 sentinel sites all over the country. This section shows the results for 10 barangays or communities in the Philippines. They have been classified into Urban NCR (or national capital region), Urban outside NCR and rural areas. The combined sample consists of 3,499 households representing a population of 15,161 persons. The breakdown is shown in Table 7. The survey was conducted between March and July of 2009 and the reference period was November 2008 to April 2009.
Meanwhile, 9.5 percent of the households with an OFW, indicated that said OFW experienced wage reduction during the period November 2008-April 2009. Almost 9 percent (8.9%) of the households who received remittances during the past 6 months experienced reduction in the amount of remittances received during the same period.
The more significant transmission channel of the crisis based on the survey appears to be through overseas and domestic employment.
Overseas Employment Out of the sample of 3,499 households, 450
The effects through overseas remittances seem to be mild. As discussed earlier in the macroeconomic section, deployment of OFWs and remittances from OFWs continue to grow. This has mitigated the impact of the crisis. Information on geographical distribution of the overseas workers may offer some possible explanations. A majority of OFWs are based in the Middle East. The said regions are weathering the global crisis relatively better than industrialized countries
Table 7: Total number of households and total population per barangay. Barangay
Municipality/City
Urban NCR 192
Households
Province
Population
No.
%
No.
%
856
24.5
2,941
19.4
856
24.5
2,941
19.4
Pasay City
NCR-4
1,738
49.7
7,729
51
Gumamela
Labo
Camarines Norte
432
12.3
2,060
13.6
Villa Angeles
Orion
Bataan
354
10.1
1,401
9.2
Poblacion III
Santo Tomas
Batangas
466
13.3
2,086
13.8
Magbangon
Cabucgayan
Biliran
259
7.4
1,230
8.1
Masikap
Puerto Princesa City
Palawan
227
6.5
952
6.3
905
25.9
4,491
29.6
Ando
Borongan
Eastern Samar
174
5
892
5.9
San Miguel
Llorente
Eastern Samar
269
7.7
1,372
9
Salvacion
Puerto Princesa City
Palawan
237
6.8
1,084
7.1
San Vicente
Santa Elena
Camarines Norte
Urban Outside NCR
Rural
Total
225
6.4
1,143
7.5
3,499
100.0
15,161
100.0
12
DEVELOPMENT RESEARCH NEWS
January - February 2010
and therefore not experiencing widespread retrenchment of foreign workers. Many overseas workers either work as a service and sales worker or is classified in the category “trades and related worker.� Some of the jobs of overseas workers include housekeepers and related workers, cooks, waiter, waitresses and bartenders, child-care workers, institutionor home-based personal care workers, security guards, and shop or market salespersons (under the services and sales worker classification), carpenters, motor vehicle mechanic, electricians, bakers, and pastry cooks (under the trades and related worker classification). Demand for these kinds of workers remains strong despite the global crisis. The Department of Labor and Employment (DOLE) and Philippine Overseas Employment Administration (POEA) acknowledge that some markets, particularly the United States, have cut job orders due to the global crisis but they also insist that labor markets elsewhere remain relatively strong.
Domestic employment: entrepreneurial activities The study also tried to determine how households were affected through local employment by looking at those who are involved in entrepreneurial activities and those who are wage earners and salaried workers. Out of the population of 15,161, 10,394 are 15 years or over 54.8 percent of the latter or 5,701 persons are considered part of the labor force, 88.5 percent of whom were employed during the reference period. This translates to unemployment rate of 11.5 percent. About 62.5 percent of employed individuals are male while the rest are female (Table 9). Only relatively few households engaged in a new business during the period (Table 10). Results showed that a mere 2.1 percent or 75 of the households surveyed actually engaged in new entrepreneurial activity during the 6-month period covered by the study.
Table 8: Outcome indcators, OFW-related, 2009. Indicator
Magnitude
Proportion
450
12.8
201
44.7
25
5.6
43
9.5
353
78.4
40
8.9
32
7.1
HH with OFW HH with returning OFW HH with returning OFW who was retrenched or laid off from work HH with OFW who experienced wage reduction HH who received remittances during the past 6 months HH who experienced a decline in the amount of remittances received HH who experienced a decline in the frequency of receipt of remittances Source: CBMS Survey 2009
Table 9: Labor force statistics. Statistics
Total No.
Population 15 years and over
Male Proportion
10,394
No.
Female %
No.
%
5,123
49.3
5,271
50.7
Labor force
5,701
54.8
3,508
61.5
2,193
38.5
Employed
5,046
88.5
3,155
62.5
1,891
37.5
655
11.5
353
53.9
302
46.1
Unemployed Source: CBMS Survey 2009
13
DEVELOPMENT RESEARCH NEWS
January - February 2010
Table 10: Outcome indcators, entrepreneurial activities, 2009. Indicator HHs engaged in new entrepreneurial activity HHs engaged in an entrepreneurial activity HHs which closed a business
Magnitude
Proportion
75
2.1
1,817
51.9
19
1.0
HHs with significant change in the monthly income from the business
158
8.7
Increase
33
20.9
Decrease
125
79.1
HHs with significant change in the no. of employed persons in the business
6
0.3
Increase
3
50
Decrease
3
50
Source: CBMS Survey 2009
Table 11: Outcome indicators, wage earners and salaried workers, 2009 Indicator HH with member who lost job Members who lost their job HH with member who experienced wage reduction
Magnitude
Proportion
92
2.6
109
2.2
74
2.1
65
1.9
8
0.2
HH with member who experienced a reduction in the number of working hours HH with member who experienced reduction in employment benefits Source: CBMS Survey 2009
Out of the 3,499 households surveyed— 1,817 or 51.9 percent—engaged in an entrepreneurial activity. Only 19, which is 1 percent of 1,817, closed their business during the survey period. Meanwhile, 125 or 6.9 percent of the 1,817 experienced a decline in their monthly income from the business. These results confirm the minimal effect of the crisis in the selected sites in terms of households’ engagement in a business or entrepreneurial activity.
Domestic employment: wage earners and salaried workers The global crisis could have potentially affected local employment given the reduction in exports. Unemployment rate, using the data from NSO, went up and employment in the manufacturing sector declined. The labor turnover ratio, as discussed in the previous section, rose during the first three quarters of 2009. During the period November 2008 to April 2009, 92 households reported job loss of at least one of their members rep-
resenting 2.6 percent of all households surveyed (Table 11). This translates to a total of 109 persons who lost their job during the period. Despite the relatively mild impact of the 2008 crisis at the household level, poverty incidence is expected to rise when the official statistics are reported in late 2010. The report will be based on the 2009 FIES. The last FIES was conducted in 2006 and at that time, poverty incidence was higher compared with the 2003 figures. While the 2008 financial crisis will likely have a small impact on the rate of poverty incidence, the sharp rise in food and fuel prices that preceded the crisis will likely take its toll on vulnerable households. Added to this is the devastation wrought by typhoons in the last quarter of 2009. The 2008 financial crisis will add to poverty incidence via the employment effects and an adjustment in the labor market via less working hours and higher underemployment.
14
DEVELOPMENT RESEARCH NEWS
January - February 2010
Table 12: GDP growth for major industrial countries and regions 2008
2009
2010fa
2010f b
2011f
World
3.0
-0.8
2.5
3.9
4.3
US
0.4
-2.5
0.8
2.7
2.4
Japan
-1.2
-5.3
1.7
1.7
2.2
Euro Zone
0.6
-3.9
-0.3
1.0
1.6
Source: World Economic Outlook (WEO) Update, January 26, 2010 (http://www.imf.org/external/pubs/ft/weo/2010/update/01/pdf/0110.pdf) a Forecast from WEO Update, July 8, 2009 b Forecast from WEO Update, January 26, 2010
Global Economic Prospects The global economy is recovering faster than expected, as illustrated by the rosier January 2010 forecasts compared to the forecasts a semester earlier (Table 12). The extraordinary amounts of fiscal and monetary stimuli undertaken by governments have helped turn the world economy around. As a result, global trade and industrial production have reversed their sharp declines. Likewise, efforts to stabilize the financial sector by assisting, for example, financial institutions clear their balance sheets of distressed assets, have prevented large and long-lasting contraction of credit, and helped break the vicious cycle of adverse feedback loops between the financial markets and real economic activity. Overall, world output is forecast to turn from an almost 1 percent decline in 2009 to a growth of around 4 percent in 2010, an upward revision by 1.4 percentage points from the forecast a semester earlier. Global recovery will, however, proceed at varying speeds, with emerging and developing economies expected to accelerate to 6 percent growth in 2010, from a modest 2 percent growth in 2009. Recovery in advanced countries, on the other hand, is expected to proceed at a slower pace, with output being forecast to increase only incrementally (by around 2 percent) in 2010. However, this is still a turnaround from sharp output declines in 2009 (International Monetary Fund 2010a). Table 12 shows output growth rate patterns in the key advanced economies, namely the United States (US), Euro Zone, and Japan. Overall, there are increasing signs that the US economy is stabilizing although high unemployment, household deleveraging, and still relatively tight bank credit remain a con-
cern. In Japan, the fiscal and liquidity measures have helped turn the economy around from a contraction in the first half of 2009, although recovery will be more gradual and will lag behind that of the US. Likewise, recovery in the Euro Zone is expected to be modest, with variation in turnaround speeds in various countries, as many of the bankbased financial systems will take time to fully heal. Some economies are also expected to experience a sluggish job market rebound (International Monetary Fund 2009). Some downside risks to the continued recovery of the global economy remain. There is a possibility that a premature and disorderly withdrawal of the fiscal, monetary and financial policies will undermine the recovery. Moreover, the large-scale and unprecedented policy interventions have resulted in considerable increase of sovereign debt burdens. At the same time, the repair of the financial sector is still incomplete, particularly in some advanced economies, with bank credit still weak and sluggish by historical standards. Thus, the unwinding of the support to the financial sector has to be orderly, so as not to undermine the still fragile nature of the recovery. At the same time, there is a need for future regulatory reforms to address the abiding systemic risks with proper macro- and micro-prudential regulations (International Monetary Fund 2010b). Prospects for the Philippine Economy in 2010 The improving global economic situation has already manifested itself in the fourth quarter of 2009. Exports rose by 5.1 percent and the Philippine economy managed to expand by 1.8 percent compared to the same period last year. This momentum should
DEVELOPMENT RESEARCH NEWS carry over into the first half of the year. Apart from the recovery in global output, the Philippine economy will receive a boost from election-related spending in 2010. Hence, there will be a significant increase in economic growth in the first half. It can be argued, however, that such recovery is not structural in nature and, in all likelihood, would not lead to relatively high growth rates in the medium term unless fundamental reforms are implemented. The critical issue remains engaging the private sector more effectively in the development process. Investor confidence will be bolstered if the elections in May 2010 are credible. It is expected that the change in administration will at least bring a fair degree of optimism. The proposed private-public partnership in infrastructure projects that was initially part of the ERP should also contribute to fixed capital. Hence, there should be a slight flurry of private investment in the second half of the year and growth in total fixed capital is forecast at a modest 4.8 percent in 2010. Meanwhile, growth in personal consumption expenditures will remain largely driven by overseas remittances. The trend in remittances from September to November 2009 (Table 6) augurs well for higher growth in 2010. A stable inflation environment and labor market will support consumer confidence. Inflation, however, is expected to be higher this year compared with 2009. The recovery in global demand will push up oil prices while increased domestic demand— particularly from the stimulus measures— will exert inflationary pressure. Inflation will average between 4 and 4.3 percent but personal consumption expenditures growth should climb back to around 4.3 percent in 2010. The production sectors hardest hit by the 2008 crisis will rebound in 2010. However, growth in manufacturing will be constrained by adjustment to lower tariffs in certain sectors brought about by the implementation of agreements under the Common Effective Preferential Tariffs for the ASEAN Free Trade Area (CEPT-AFTA). The ChinaASEAN Free Trade Agreement will also be enforced beginning January 2010. The agri-
15
January - February 2010
culture sector is poised to have a bad year because of El NiĂąo and this will adversely affect food manufacturing. Nevertheless, agriculture is expected to manage a growth rate of 0.5 percent. The manufacturing sector is forecast to expand by 3.0 percent. The fastest growing sector is expected to be services, which is forecast to expand by 5 percent. The rise in consumption, investment, and exports will have spillovers in trade and transport, communication, and storage. The sharp recovery in the stock market in 2009 contributed to rapid growth in finance services. Lower interest rates also seem to have sustained credit growth. This is reflected in the higher growth of money supply, from an average of 6.6 percent during the first 10 months of 2008 to 13.6 percent in the same period last year.8 A critical issue is when the BSP will start reversing expansionary measures as part of the Government’s overall exit strategy. Some analysts expect “a tweaking of policy rates only in the latter half of the year (particularly after the election month of May) when demand and liquidity factors may start to become a more crucial inflation concern as the economy begins to accelerate or when US federal funds rate and other major policy rates may be increased.â€?9 Hence, the momentum in the finance sector is likely to be maintained in 2010. Finally, on the whole, GDP growth in 2010 is forecast to be 4.0 percent.DRN References International Monetary Fund. 2009. World economic outlook. http://www.imf.org/external/ pubs/ft/weo/2009/02/. October. ———. 2010a. World economic outlook: update. http://www.imf.org/external/pubs/ft/weo/ 2010/update/01/pdf/0110.pdf. 26 January. ———. 2010b. Global financial stability report: market update. http://www.imf.org/external/ 8 This refers to M2. The difference in total loans outstanding was used as a proxy for credit flows. Between October 2009 and October 2008, this grew by 5.7 percent in real terms. Between October 2008 and October 2007, credit grew by 6.9 percent in real terms but this came after a contraction of 2.8 percent in the previous 12 month period. 9 R. L. Bernardo and M. D. Gonzales. “Uninspiring momentumâ€?, Market Brief, Global Source Partners, January 28, 2010.
16
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DEVELOPMENT RESEARCH NEWS
STAFF BOX
DEVELOPMENT RESEARCH NEWS Vol. XXVIII No. 1
Editorial Board: Dr. Josef T. Yap,
January - February 2010
President; Mr. Mario C. Feranil, OIC
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January - February 2010
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The Philippine...from p. 15
Box 1:
Cont'd.
pubs/ft/fmu/eng/2010/01/ pdf/0110.pdf. January. Majuca, R.P. and J.T. Yap. 2010. The 2008 global economic and financial crisis: the Philippine case. Paper presented at the Conference on Managing Economic Crisis in Southeast Asia, organized by the Institute of Southeast Asian Studies. Singapore, 29 January. Reyes, C.M., A.B. Sobreviñas, and J.J. de Jesus. 2009. The impact of the global financial crisis on poverty in the Philippines. Paper presented at the 6th CBMS Philippines National Conference. Manila Diamond Hotel, 8-10 December. Yap, J.T., C.M. Reyes, and J.S. Cuenca. 2009. Impact of the global financial and economic crisis on the Philippines. Philippine Institute for Development Studies Discussion Paper Series No. 2009-10. Makati City.
struction grew rapidly in the first three quarters of 2009 (Table 3). One reason for the jump in the second and third quarters is the acceleration of the implementation of various infrastructure projects under the Comprehensive Integrated Infrastructure Program (CIIP). The CIIP focuses on upgrading road networks and air and water transport facilities. This is to support the thrust to link the entire country though an effective transport network that would open up new economic opportunities, reduce logistic costs, and increase access to social services. It should be noted, however, that the “massive government spending that helped buy us some growth now will surely come back to us as a renewed heavy debt burden later. Our past experience has consistently shown how such debt overhang has gotten in the way of faster and broader-based economic growth and development.”* Unfortunately, private investors have not responded favorably to the looser monetary conditions and fiscal stimulus. Private construction even shrank in the last three quarters of 2009. Hopefully, a favorable outcome from the proposed Public-Private Partnerships will materialize. The implementation of ERP programs that focus on infrastructure is expected to put the country in a better position in attracting foreign investments, which could create more employment during the recovery period. Nevertheless, it should be emphasized that with a larger fiscal deficit looming, the Government will have little leverage left in addressing the adverse impact of the crisis. *
C. F. Habito “Where did the growth come from?” Philippine Daily Inquirer, August 31, 2009.