Benjamin E. Diokno, Ph.D.

1. Philippine economic prospects, the 2010 elections and implications on the banking sector Benjamin E. Diokno, Ph.D.

2. Good News, Bad News • The good news is that the synchronized and coordinated monetary easing and fiscal stimulus programs worked. Confidence rebounded strongly on both the financial and real fronts, as extraordinary policy support forestalled another Great Depression. Diokno I Economic Briefing 112009

3. Good News, Bad News • Most economies are starting to recover. But recovery is proceeding at different speeds. There is also the risk of a fullback in growth in 2011 …as the positive effect of this stimulus fades against a background of continued fragile corporate and household sentiment. • One thing is sure: global growth is unlikely to return to the trend rate of recent years until perhaps after a few years. • Achieving sustained robust growth over the medium term will depend critically on addressing the supply disruptions generated by the crisis and rebalancing the global pattern of growth. • Continued policy efforts are needed to sustain the recovery and prepare for exit. Diokno I Economic Briefing 112009

4. How will the global economy rebalance?IMF, WEO, October 2009 • On the supply side, financial firms will need to be restructured and markets repaired to deliver adequate credit for sustained increases in investment and productivity. And labor will need to be redeployed across sectors. • On the demand side, rebalancing depends on switching from public to private demand and from domestically to externally driven growth in many economies that experienced asset price busts. • By implication, economies that previously relied on export-led growth will need to switch from externally to domestically driven growth. Diokno I Economic Briefing 112009

5. Overview of the Philippine economy The structure of the economy has not changed significantly; the services sector dominates The slowdown which started in 2008 is broad-based. In 2009, the industrial sector contracted by 2.0%. Diokno I Economic Briefing 102709

6. The economy has suffered a savage fall Diokno I Economic Briefing 102709

7. Agriculture, fishery and forestry • Agricultural output was stuck at zero growth in 2009 -- compared to an average growth rate of 4.01% during the most recent peak (2003 -2007). • The agricultural sector accounts for 19.4% of GDP Diokno I Economic Briefing 102709

8. Industrial sector • The industrial sector contracted by 2.0% in 2009, a sharp drop from its robust growth of 4.9% from 2003 to 2007. • Manufacturing was the biggest loser, contracting by negative 5.1% from an average growth of 4.7% during its recent peak. That’s a swing of about 10%. Even the utilities sector has contracted. • On the bright side, construction grew by 5.8% in 2009 owing to faster public construction; however, private construction contracted during the same period. Diokno I Economic Briefing 102709

9. Services sector • The services sector slowed significantly to 3.2% growth in 2009 – significantly less than its average growth from 2003 to 2007. • The sharp fall was broad-based. --finance, trade, real estate, transportation, communications and storage and private services. The only exception is government services. • Slowdown in wholesale and retail trade is sign of weak consumer demand. Diokno I Economic Briefing 102709

10. Aggregate demand slowed in 2008 and 2009 The economy is consumer-driven; capital formation is low and falling Personal consumption plummets, capital formation dives, public construction contracts by 4.4%. The slowdown in 2008 and 2009 was across-the-board Diokno I Economic Briefing 102709

11. Challenges for the next administration • Low investment rate, particular low foreign direct investment • Unemployment: large and rising joblessness • Poverty owing to slow, non-inclusive growth and fast-growing population • Severe budget constraint—the next administration will be faced with narrowing fiscal space Diokno I Economic Briefing 102709

12. Foreign direct investments down sharply FDIs were low by international standard; hit rock-bottom in 2001 Among ASEAN-5 economies, the Philippines received the lowest FDIs. Lower FDIs mean lower long-term growth and thus, lower employment. Diokno I Economic Briefing 102709

13. It’s unemployment , stupid • The focus of government intervention should be on job creation and job preservation. • Even before the world economic crisis, the Philippines’ jobs market was already in a critical state: in 2007, there were on average, 2.7 million unemployed and 6.8 million underemployed. But in addition, about 1.3 million young Filipinos join the labor force every year. Diokno I Economic Briefing 102709

14. It’s unemployment, stupid Diokno I Economic Briefing 102709

15. Unemployment-hunger linkWith weak social protection, hunger incidence deepens as unemployment rises Diokno I Economic Briefing 102709

18. Poverty outlook is grim Poverty incidence will get worse before it gets better Diokno I Economic Briefing 100909

19. But let’s talk of warm bodies Why poverty has worsened in 2009? • Food and fuel prices rose sharply in 2008 • The economy slowed as the world economy contracted –thus unemployment worsened. Job prospects remain gloomy in the face of weak and fragile recovery. • Population continues to grow - the less educated poor outgrowing the educated rich.

20. What should the government do? • Continue the fiscal stimulus by increasing spending in essential, shovel-ready infrastructure, education, health and agriculture • Restore consumer and investor confidence Diokno I Economic Briefing 102709

21. But the government’s ability to increase spending will be constrained by weak public finances • Tax-to-GDP ratio is falling • Budget deficit is ballooning • National government debt is soaring Diokno I Economic Briefing 102709

22. Weaker, low-yielding tax systemTax-to-GDP ratio risks reverting to low levels seen during the Marcos final years Diokno I Economic Briefing 102709

23. Fiscal House in DisarrayGMA run large deficits from 2001-04; huge deficits have reemerged in recent yearsFis Diokno I Economic Briefing 102709

24. High and Rising Public DebtAs the world economy recovers, interest rates would rise, leading to higher debt service Diokno I Economic Briefing 102709

25. What will the next President inherit? A huge public debt and narrow fiscal space. Fiscal flexibility, defined as recurrent revenues less personal services, interest payments, internal revenue allotment (IRA) and net lending would disappear in 2010 But what if the next administration needs a second fiscal stimulus program? Diokno I Economic Briefing 102709

26. Near and medium-term macroeconomic outlookAuthor’s forecast, March 2010 • In the medium term, the Philippine economy will grow below its previous peak, and in line with a slow, new ‘normal’ growth for the world economy. • The peso could appreciate should the US dollar continue to weaken and should the Philippine government continue to borrow from abroad to finance its budget deficits. • Balancing the national government budget by 2013 is ill-advised. A gradualist cut in the deficit is recommended to avoid a W-shaped recovery. Diokno I Economic Briefing 102709

27. We’re at a crossroads once more • The next President will face daunting challenges. But a ‘good’ elections, followed by a smooth transfer of powers, could result in renewed confidence in our political system. • What qualities are we looking for in the next President? • Strong leadership and willingness to undertake bold reforms, such as, first, fundamental tax reform (shift from income-based to consumption based taxation), second, more focused public spending program, and third, changing the way the government operates by embracing transparency and accountability in the use of public funds. • Excellent communicator. The next administration’s economic recovery program will involve a lot of pain. This program has to be communicated well to all Filipinos -- especially the poor and powerless. Diokno I Economic Briefing 102709

28. Litmus test for the next President • What’s the presidential candidate’s position on the following issues? • Higher value added tax, lower personal and corporate income tax • Higher spending for social services such as conditional cash transfer and universal basic health care • Cutting pork barrel (P75 million per congressman, P200 million per senator) • Declaring the existence of a budget crisis and cut Internal Revenue Allotment by one-fourth • Program for population management Dilemma: what’s the likelihood that the presidential candidate will do what he promised if elected? Diokno I Economic Briefing 102709

29. What the country needs now? • An honest, orderly and peaceful election (HOPE). Elections should not be seen as a source of economic growth. Rather it should be seen as a source of pride by a free and democratic people. Every credible and peaceful election is a building block for a strong democracy. But perhaps the only time we’ve had a credible presidential election under the newly restored democracy was in 1998 when Estrada was elected – and then he was removed unconstitutionally. • The important question is: Can we afford to have another failed election? Diokno I Economic Briefing 102709

30. Thank you! Benjamin E. Diokno, Ph.D. School of Economics, U. of the Philippines -bediokno@gmail.com Diokno I Economic Briefing 102709