The 2008 global financial and economic crisis produced a synchronized recession among industrialized countries leading to a retrenchment in world trade. the recent shocking US credit rating downgrade is just a proof that the 2008 global crisis has not been resolved. It is just a start for a deeper severe problem that is expected to last for years.
The cause of the deceleration in the Philippine economy was the surge in inflation triggered by the sharp rise in food and fuel prices. The slowdown of the Philippine economy in 2008 is not primarily a result of the current global financial. This implies there is a huge downside risk for the economy which is reflected in the sharp deceleration in the first two quarters of 2009.
The worsening economic condition of the US has a great negative on the Philippines in terms of weaker remittances, lower exports, and more problematic investments. Financially, it will affect the interest rates, the foreign exchange rate, Philippine debt and the stock market.
The negative effect of high inflation came through various channels: households postponed consumption expenditures, particularly durable goods; the high cost of fuel scaled back services in the transportation sector; and higher prices caused an increase in the cost of production. Since the Philippines is in an unenviable position, from the very first, of having to deal with both the short-term issues brought about by the 2008 crisis and unresolved structural problems. One area that can be explored is whether the present crisis can be an impetus for more fundamental reforms. However, there is also the possibility that the crisis will simply expose the fragile nature of the Philippine economy and worsen the poverty situation.
Impact on Asset Markets
As a result from the declaration of the bankruptcy of Lehman Brothers and other big financial firms around the world the capital flows reversed to emerging and developing countries. It mirrored the sales of debt and equity securities by the nonresidents, the selective withdrawals of bank deposits held wit domestic banks and a decline in inflows of foreign direct investments. This resulted to sudden drop to the prices of equity securities, it depreciated by 3 percent.
Investment inflow to the country will be affected. Foreign direct investments to the Philippines in 2010 decline by 13% compared to the previous year. The same downward trend has continued during the first quarter of 2011. These latest figures were given by the Bangko Sentral ng Pilipinas.The Philippine government already admitted that the US debt crisis will be causing some uncertainties among investors and may slow down the global economy.
Impact on the Financial Sector
In year 2008, the ratio of NPLs (nonperforming loans) continued to decline, and was slightly increased in year 2009. Also in year 2008 most banks continued to report simultaneous high rates of returns on assets an equity, and didn’t experiences increases in impaired assets. This exposed the Philippine banks to the toxic structured mortgage products that were extensively sold internationally. Given largely domestically-focused business and relatively strong economic activities in 2007, profitability of Philippine banks has generally remained high in 2008. Why? Because, policies implemented in the aftermath of the 1997 crisis did play a role in limiting the impact of the 2008 global liquidity crunch. The BSP, however, must remain vigilant and implement measures to maintain stability of the financial sectors.
The exposure of Philippine banks to this weakening US condition may lead to contraction of local businesses and job losses. The local banking system will be prudent in lending to small enterprises. Those enterprises that do not have an access to lending would result to business slowdown and establishment closures would be apparent. Business slowdown will worsen the country’s condition. Unemployment will continue to rise. Business owners will be forced to lay off their employees. It would be more likely felt in all trade and investment enclaves in the country, both manufacturing and business process outsourcing (BPOs), and then by the few Filipino firms exporting to the US and related markets.
Unfortunately, U.S crisis may possibly hit the exporters since about 20 percent of the country’s exports go directly to the U.S. The growth in exports for the first quarter of 2011 slowed down.
Impact on the Real Sector
Another important factor that affects Philippine economy was the pronounced deceleration in construction activity following a surge related to the 2007 elections and the initial implementation of President Macapagal-Arroyo’s ambitious infrastructure program.
On the production side, significant slowdowns occurred in manufacturing, electricity, gas, and water, trade, and finance services.The manufacturing sector was buffeted by the 29.2 percent contraction in exports during this period. The food manufacturing sector was able to offset the contraction in other sub-sectors, particularly electronics and furniture, in the first 3 quarters of 2008. This is the reason that value added in manufacturing actually grew slightly faster in 2008 compared to 2007.
The 2009 first half performance does not predict well for the Philippine economy. Both value added in the manufacturing sector and private investment plunged during this period. Hence, the Philippines have to contend simultaneously with both short-term demand management issues and medium-term structural issues. It should be noted that even before the crisis, the Philippines had one of the worst records in terms of poverty alleviation in East Asia and one major reason is that it has not yet hurdled the low-equilibrium growth trap.
In 2008, remittances—as reported in the balance-of payments account— amounted to $16.4 billion or 13 percent of GDP.
The Department of Labor and Employment (DOLE) identified the following OFWs who are vulnerable to displacement due to the global economic and financial crisis:
• OFWs who work in the US under temporary working visas (129,000)
• Seafarers in cruise ships (130,000)
• Factory workers in Korea, Taiwan, and Macau (268,000)
• Household service workers in Singapore, Macau, and Hong Kong (48,000)
These groups comprise only about 15 percent of the roughly 4 million OFWs. Data from the Philippine Overseas Employment Administration (POEA) indicates that during the first ten months of 2008, the number of Filipinos deployed abroad rose considerably by 18.1 percent to 1,049,077 compared to 888,339 in the same period in 2007. For the entire year, 2008 deployment rose by 14.7 percent to 1,236,013 from 1,077,623 in 2007.
During the first quarter of 2009, the flow of returning OFWs did not increase significantly. However, there is concern that the slump in global shipping will adversely affect Filipino maritime workers. On the other hand, some shipping lines are replacing highly-paid Western nationals with lower-paid Filipinos. Data indicate a slowdown in the growth of remittances to only 3.8 percent in the first 7 months of 2009 compared to 18.2 percent in the same period last year. Employment in the domestic economy has been adversely affected by the economic slowdown. While the unemployment rate in 2008 increased as expected, it rose only to 6.8 percent from 6.3 percent in 2007. This is still much lower than the unemployment rates recorded during the past 20 years (Table 12). However, the unemployment rate jumped to 7.7 percent in the first quarter of 2009 although it recovered slightly to 7.5 percent based on the April 2009 survey and 7.6 percent in the July 2009 survey. The April survey also showed that while 2.4 million part time jobs were created, nearly a million full-time jobs were lost.
On overall impact, the inflation causes a lot of OFW to lose their jobs and forced to go home in the Philippines.
Impact on Macroeconomic Balance: Fiscal Deficit and External Accounts
The crisis is expected to affect the macroeconomic balances in the Philippines. The national government supposed to have fiscal deficit of 3.2 percent in the GDP in the year 2009.
Reasons why deficit is expected to widen
1. The Government is reluctant to cut expenditures at a time when the economy is slowing down considerably.
2. The Government has been buffeted by weak revenues.
The tax to GDP ratio has stalled in the range of 12-13 percent of GDP compared to 14 percent in 2008 and a peak of 17 percent in 1997.
Global crisis will further worsen the Philippines’s own economic crisis. However, the economy would have been less vulnerable if the domestic economy were not overly dependent on trade, foreign loans and capital, and if nationalist economic policies were in place.--BAN.^^
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